Trend analysis on the financial markets

A technical and chart analysis is basically useless without a trend analysis. It is actually by identifying the most pronounced market trends and anticipating future trends that it is possible to implement investment strategies that are coherent and therefore profitable in stock market speculation. But how do you undertake this trend analysis?

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Trend analysis on the financial markets
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How to complete a trend analysis?

The elements that can be obtained from a technical analysis are numerous but one type is particularly useful for determining the strategic entry and exit points on the markets: The trends.

There are different methods to analyse these trends, but all these techniques use the charts and highly precise indicators.

 

The technical trend indicators:

A ‘trend indicator’ is a list of elements that are used to analyse assets and their movements on the stock exchange market.

The major trend indicators measure both the speed and quality of a studied trend to determine its strength. With this analysis we can therefore identify:

  • Exaggerated rising or falling market conditions caused by overselling or overbuying.
  • The strength or fatigue of a trend using the differences.
  • The general market trend, either rising or falling.

However there are limits to the usefulness of these indicators that can at times produce contradictory signals. It is therefore important to choose your indicator carefully according to if the market is moving in a defined direction or not. Due to this fact we can distinguish between the trend indicators and the oscillators.

  • The trend following indicators are particularly useful in a market that is already following a precise direction.
  • The oscillators should be used when you wish to identify the pivotal points of the market.

 

The trend following indicators:

The trend following indicators therefore particularly enable an estimation of a trend’s strength when a market is following a clear trend.

Among the most pertinent of the trend following indicators can be found the following elements. Some of these indicators will be detailed more fully in a dedicated article.

  • The MACD, or Moving Average Convergence / Divergence, that uses moving averages.
  • The Bollinger Bands that use both the moving averages and the support and resistance levels.
  • The DMI, or Directional Movement Index, that enables the identification of a market trend and the measuring of its strength.
  • The parabolic SAR (Stop and Reversal) that here identify the pivot points of the market.

 

The oscillators:

The oscillators are also used in trend analysis but here they are used without a clear market direction. There are different types of oscillator for different usage methods including:

  • The Relative Strength Index, or RSI, that evaluates the difference between the rising and falling trends.
  • The stochastic oscillator that determines the over-sell or over-buy elements on a given asset.
  • The %R of the Williams that measures the speed of a trend and indentifies pivot points.
  • The Momentum and the ROC that measures the acceleration and deceleration of a trend.
  • The CCI or Commodity Channel Index that is used on the commodities market.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.