How to carry out a trend analysis?
There are many things that can be learned from technical analysis, but there is one kind that is particularly interesting for determining strategic entry and exit points in the markets: trends.
To analyse these trends, there are several methods, but all of them use charts and specific indicators.
Technical trend indicators :
A list of elements used to analyse securities and their evolution on the stock market is called a trend indicator. To obtain this indicator, a mathematical formula must be used that takes into account, for a given period, both the price and the volume of trading of an asset. The result is used to identify the market situation and therefore to make profits.
The main trend indicators measure both the speed and the quality of the trend under study in order to determine its strength. From this analysis, we can then deduce :
- Excessive upside and downside situations caused by overselling or overbought stocks.
- The strength or weakness of the trend using divergences.
- The general upward or downward market trend.
However, there are limits to the use of these indicators, which can sometimes give contradictory signals. It is therefore important to choose your indicator carefully, depending on whether the market is moving in a specific direction or not. A distinction is therefore made between trend-following indicators and oscillators.
- Trend-following indicators are primarily used in a market that already has a clear direction.
- Oscillators are best used to determine market turning points.
Trend monitoring indicators :
Trend-following indicators therefore allow for an estimation of the strength of a trend when the market is following a real direction.
Among the most relevant trend monitoring indicators are the following. Some of these indicators will be explained in more detail in a dedicated article.
Oscillators are also used in trend analysis, but this time they are used outside of an obvious market direction. There are several types of oscillators using different methods including :
- The Relative Strength Index (RSI) which measures the difference between upward and downward trends.
- The stochastic oscillator which determines the overbought or oversold elements of a given asset.
- The Williams %R which measures the velocity of a trend and identifies turning points.
- Momentum and ROC which measures the acceleration and deceleration of a trend.
- The CCI or Commodity Channel Index which is used in the commodity market.