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Technical trend analysis is the study of the price movement of a particular security or entire market over time in an effort to predict future price movement. This type of analysis does not concern itself with any fundamental information about the institutions underlying the securities, instead focusing on the upward and downward movement of prices. To perform technical trend analysis effectively, investors must not only study price charts which show the trends of prices but they must also be concerned with the volume of trading during these periods, since volume generally supports trends. In addition, investors should be aware of chart patterns and moving averages, two of many methods available for trend analysis.
There are generally two ways to study a given market. One is through fundamental analysis, which is concerned with the reasons behind market prices. The other is technical analysis, which is simply concerned with past price performance as it relates to future prices. Central to the practice of technical analysis are trends, which, if spotted accurately, can allow investors to ride them to profits. This is the reason that technical trend analysis is so popular among investors.
Price charts are usually a part of any effective technical trend analysis. By plotting out the prices of a security over time, an investor can get a sense of the direction it is moving. It is important to remember that trends of longer durations are usually more trustworthy than shorter trends. Still, investors that can time even a quick-moving trend can reap the benefits.
One of the most important concepts in technical trend analysis is trading volume. The idea is that a trend has a better chance of sustaining itself if it is backed with a significant amount of buying and selling of the security, which is also known as its trading volume. A trend not supported by volume is likely to peter out or even reverse direction without warning. For that reason, using volume indicators in conjunction with price charts can be a solid way to spot trends.
Investors have the choice of many different methods if they choose to perform technical trend analysis. For example, chart patterns are formed as prices go up and down, with the idea that certain patterns are common among all securities. Moving averages are another popular method of trend analysis. A moving average takes the average price of a security over a period of time and goes up and down as the days pass and the newest price information replaces the oldest. The rising and falling of the average generally corresponds to upward and downward trends, respectively.
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