Identifying share market trends is an excellent way of predicting how the Indian stock market is likely to move soon.
As an investor, you would have seen the stock market take a sudden jump or dive and unsure about why it happened. If you are grasping for answers, it is time to study trend analysis to make better sense of the share market.
Understanding stock market trends
Simply put, the general direction in which a stock moves is regarded as a stock market trend. Depending on a bullish or bearish market, stock market trends tend to move upwards or downwards. For a trend to be considered as one, it must move in a specific direction for a specified duration.
Making sense of trend analysis
Considered as a form of comparative analysis, stock market trend analysis is a specialised analytical technique. Its goal is to employ past data to predict the future direction of stock prices. Most investors consider short, intermediate and long-term trends to recognise bull runs in the market. They also look at stock market trends to seek trend reversals that could predict a downturn.
Advantages of employing trend analysis
To become a better trader, you can make use of trend analysis in selecting the optimum number of times to enter and exit stock positions. Analysing trends can help you spot issues and early warning signs before they become full-blown. Sometimes you may discover a dip in a trend when there could be no reason to expect one. This could be your incentive to investigate further and understand the reasons behind it.
Trend analysis holds great importance; it can help you be ahead of the curve. Additional factors that can further enhance your trading abilities could be to look into the company’s financial conditions.
Market movements through trend analysis
To give you an edge in predicting how a stock will behave in the future, you must first pick the market segment you wish to analyse.
Secondly, consider the overall performance of the market that you have selected. Here, a market segment does not need to be industry-specific, such as oil and gas or technology. Various types of investments as a whole can be viewed, such as the bonds market or real estate investment trusts.
Once you have chosen your sector, look into its overall performance. These could include various criteria such as changes in regulations, political landscape, scarcity of a specific raw component, labour woes and so on.
You can use this data as a market trend analysis to predict market movement in the future. It can give you an idea of its overall direction, whether upwards or downwards, over a specified period.
Analysing the general performance of the chosen market
You can examine the performance of a selected market either month by month or annually. A year on year analysis typically provides a more accurate comparison. This is because monthly trends that show how the market or individual stock has performed does not account for seasonality. Hence, rather than looking at how the market performed in August as compared to July, you can compare August of this year to August of last year.
For instance, you are studying the market of umbrella manufacturers. You notice a steep drop in demand for umbrellas once the monsoon ends. If you are considering monthly trends, you may think that the market is performing poorly before winter arrives. However, comparing the performance of umbrella manufacturers this year as compared to last year can provide an in-depth perspective.
Tips on identifying market trends
- News catalysts such as government legislation, analyst revisions, lawsuits, mergers and acquisitions, new product or service announcement, earning reports, political unrest etc.
- Stock screeners are practical tools offered by leading broking houses such as Kotak Securities that can help you set your own metrics and display stocks that fit your criteria.
- Stock indicators or statistics assess prevalent market conditions and help to forecast financial trends or potential economic movements.
Using trend analysis as a technique can help you understand how the market’s past behaviour or an individual stock’s behaviour over the year can predict its future. Although trend analysis offers no guarantees on profitability, enhanced knowledge can help tip the odds in your favour.