Can This Technique Predict Future Market Movements?
Dear Penny Stock Millionaire,
You know that feeling when you see the stock market take a sudden jump or dive, and you’re not quite sure why it happened?
If so, you need to learn trend analysis now. I know, I know. So technical. So … analytic. But this is important. This can help you make far better sense of the market.
Trend analysis is a great way to predict how the market might move in the future, and it can you help tip the odds in your favor when it comes to trading.
In this article, I’ll break down trend analysis, how it works, and why its a valuable skill for any trader.
What Is Trend Analysis?
Trend analysis is a technical analysis technique, and also considered a type of comparative analysis.
The goal of trend analysis, is to use past data to predict the future movements of stock prices.
It’s pretty straightforward … A trend is the overall direction that the market seems to be moving in over a given period. As a stock trader, what’s happened in the past can give you a solid idea of what to expect from a stock in the future.
Investors look at short-, intermediate-, and long-term trends. They use trend analysis in an attempt to identify bull runs in the market and find trend reversals that show it might take a downturn.
Both upward and downward trends can be identified by using trend analysis.
A huge part of trading is psychological — identifying and going with the trends, instead of against them, can be a tremendous boost an investor’s profit margin.
Trend analysis looks at a stock’s historical data. It also accounts for multiple other factors, like competition, market conditions, and general changes to the sector.
Benefits of Using Trend Analysis
Trend analysis can help you pick optimum times to enter and exit stock positions — helping you become an overall better trader.
It’s also beneficial for spotting early warning signs. Careful trend analysis can sometimes help a trader spot potential problems before they become widely known.
If you spot a dip in a trend where there’s no reason to expect one, that’s your cue! Dig deeper and find the culprit.
That’s the importance of trend analysis — it helps put you ahead of the curve.
Of course, a smart trader will consider lots of other factors, like a company’s financial conditions. But trend analysis is another valuable asset to add to your toolkit.
How to Conduct Trend Analysis
So now you understand why trend analysis can be useful for traders. It’s almost like having a crystal ball that can give you a better chance at predicting how a stock will behave in the future.
Ready to learn how to do trend analysis for yourself?
First, you’ll need to pick which market segment you want to analyze. Then you’ll look at the general performance of the market you select.
Determine Which Market Segment Will Be Analyzed
Before you can start doing trend analysis, you need to first decide which market segment you want to analyze …
A market segment doesn’t have to be industry specific, like pharmaceuticals or automotive. You can also use trend analysis to look at different types of investments as a whole, like the bond market or REITs (real estate investment trusts).
Once you pick your sector, it’s time to look at its general performance. That includes anything that can affect it — new government regulations, shortages of a specific raw material, and so on.
Next, you’ll use this data for market trend analysis to predict how the market will move in the future. You’re mostly looking for the overall direction, whether up or down, over a specific future time period.
Analyze the General Performance of the Selected Market
The most common time frames to analyze the performance of a market over are month by month or year over year.
Monthly trends show how a market or individual stock performs from one month to the next. What that doesn’t account for: seasonality. And that can be key depending on the market.
A year-over-year analysis can give a more accurate comparison. Instead of looking at how the market performed in September compared to August, you instead compare September of this year to September of last year.
Let’s say the market you’re studying is swimming pool manufacturers, and there’s a steep drop in demand for swimming pools once the summer ends. If you look only at monthly trends, you might think the market is performing poorly once autumn arrives.
But comparing performance between this year and last year can give you a much better perspective.
Overall, year-over-year trends can be better predictors of future market activity. It gives most of the benefits of comparing month to month but eliminates variabilities like seasonality.
The Bottom Line
Trend analysis lets you look at where things have been, and the catalysts that caused price changes over time. That will allow you to see price change patterns that you missed before.
If you apply trend analysis to your trading it can take it to the next level.
It’s not going to happen over night, nothing worth doing ever does. It’s going to take time and practice.
But if you dedicate yourself to using different technical analysis tools, like trend analysis, over time, it will give you a serious leg up over traders that pick stocks out of emotion or without proper backup.
Tomorrow, I’ll tell you exactly what to look for and how to perform trend analysis yourself.
Editor, Penny Stock Millionaires