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How Do I Perform a Trend Analysis?

Article Details
• Written By: Jim B.
• Edited By: M. C. Hughes
2003-2020
Conjecture Corporation
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Performing a trend analysis on different stocks in the stock market requires accumulating past price data on the stocks in question in an attempt to judge their future performance. Charting these prices is a good start to analysis, since the chart will show the up and down movement of a stock over a period of time. In addition, calculating moving averages, which change as each new bit of price data replaces an outdated piece of information, is also an effective method of trend analysis. Measuring volume of trading on a specific stock can also indicate whether a trend is trustworthy or due for a correction.

Many people believe that all of the pertinent information necessary to trade a specific stock successfully can be found in the stock's past performance. The idea is that the past performance will show some sort of trend that will eventually play itself out once again in the stock's future. There are many different methods of trend analysis available, but the one general rule is that the more information available to investors, the more reliable the analysis will be.

One of the easiest ways for a beginning investor to perform a trend analysis is by constructing a price chart. The horizontal axis of the chart should be the dates the prices were measured, while the vertical axis will show the corresponding prices of the stock in question. Doing a chart in this way will give investors an easily-understood visual to show which way a stock tends to move over time. If there are a lot of changes in direction, it means that the stock is especially volatile and hard to predict.

Moving averages are another way that trend analysis can be performed. Calculating a moving average requires first taking the average price of a stock for a certain period of time, like, for example, 10 days. On the 11th day of the cycle, the average will change since the newest day will replace the first day in the calculation. Watching how the moving average changes as time goes by can reveal trends in either direction.

Some experts who perform trend analysis believe that a sudden movement in price is only indicative of a trend if it was accompanied by a large volume of trading. The volume on a given day is the amount of times that a stock was bought and sold by investors. If, for example, a big spike in price is accompanied by a high volume of trading, it could mean that the upward move will continue. Low volume levels mean that the price changes aren't to be trusted.