Let's Understand the Stock Market: The Trends & their Types

Ever look at a stock price chart and notice the daily fluctuations? But, there is a market trend that underlies all the daily fluctuations. This trend can be observed over a longer time period.

Technical analysis is all about identifying the market trend. Technical investors look at past price patterns to form opinions about market trends. You will then decide what course to take with respect to a stock. Understanding market trends is crucial. This section will discuss market trends and their application to stock selection. It will also explain how to identify market patterns and analyse them for profitable investments.
 

WHAT IS MARKET TREND?

Stock prices can fluctuate in the short-term, as we have seen in an earlier section. Stock prices don't always move in a straight line. You will find a more defined market trend if you zoom in and examine slightly longer-term price trends.
 

A trend is simply the general upward or downward movement in a stock's stock price over time. A trend is a movement that is upward in nature. Conversely, a trend that is downward over time is called an "uptrend". Investors are more inclined to buy stocks in an uptrend, and sell those in a downtrend.
 

However, stock prices move in a zig-zag manner. Technical analysis doesn't simply look at how much a stock has moved over time. We pay attention to the details, such as how much the stock rose in an uptrend and how much it fell in a downtrend. We also look at the price of the shares, which is the top and the bottom.
 

Let's start with some key terms. These words are often repeated in technical analysis.
 

• TOPS AND PEAKS -

  We think of mountains when we hear the term "peak". The same applies to stock charts. You can see mountains and hills. Stock market parlance calls the tip a peak. The stock price peak, or top, is the highest price at which the stock reached.
   

• TROUGHS OR BOTTOMS

  You can turn the mountain upside-down to create a valley or a trough. It is the lowest point of ground. Stock charts have the exact same 'bottom' and 'trough'. This is the lowest price at which the stock dropped to.
   

Let's now look at the three types market trends:

Image 1

• UPTRENDS:

  An uptrend is when both the stock chart's peaks (tops), and troughs, (bottoms), keep growing in a steady fashion. Every day, the stock price reaches a new high or falls below its previous peak. This does not have to be a lifetime high. This could also be the stock's highest level in the last few weeks, months or days. The market's positive sentiment is evident by the steady rise in tops, and then falling again. The market expects that the stock will appreciate more than it depreciates. This means that more investors buy the stock, driving up its price. Investors see every stock drop as an opportunity to purchase more. They won't wait for the stock to drop to its previous level. They purchase the stock immediately. This stops the fall.
   

  Let's say a stock moved the following over the past seven weeks: Rs 60, Rs 52 and Rs 63. Rs 55, Rs 65 and Rs 57. Rs 69. Each peak, which is Rs 60, Rs 64 and Rs 65, is higher than the last. Each trough is the same. This is the classic uptrend.
  Some uptrends, however, are marked by price drops and then a decrease in growth. This will be discussed later in the segment. The stock may still rise, but it comes with a high level of risk.
   

• DOWNTRENDS:

  A downtrend is when a stock is falling continuously. The successive peaks are not only lower but also the corresponding troughs. Investors in the market believe that the stock will continue to fall. Investors use every little increase in stock price to sell their existing shares. At these levels, no further buying is permitted. This stock should not be purchased, regardless of how low its price is--especially if it's a short-term investment. You may be able to wait for the stock price to fall further if you are a long-term investment.
   

• SIDEWAYS/ HORIZONTAL TRENDS :

  A stock that is in a sideways trend doesn't move significantly in either direction for a long time. Stocks have peaks and troughs that are constant. There is not much to make a decision about whether or not to purchase a stock.
   

WHY SHOULD YOU UNDERSTAND THE MARKET TRENDS

You can only achieve the best with patience and determination. Even though this may sound complicated, keep going and put your money where it is needed.
 

It is crucial to understand market trends. This will tell you which stocks will move up and how much risk is involved. You may lose good profits if you sell before the price reaches its peak. You may also lose out if the price drops to its lowest point before you sell it.
 

HOW TO IDENTIFY THE MARKET TRENDS

We've already discussed the various types of market trends. Let's now look at an example to help us identify market trends.
 

Let's say that the stock price at the end each week was Rs 35, Rs 38 and Rs 27, Rs 40, R 40, Rs 24, Rs 24 and then Rs 41. A price chart for such a stock might look like this:

Image 2

You will see that the stock drops by a larger percentage every time it falls than it did the previous occasion if you pay attention. Each of the three troughs on the stock chart - Rs 35, Rs 27, and Rs 24 - are all successively lower than their predecessors. Similar to the previous, each time the price goes up, it is less than before. You can see how gradual the rise from Rs 38 to 40, and then to Rs 41 has been.
 

First-hand observations suggest that the stock has performed well, as it has appreciated between Rs35 and Rs41. But a closer inspection will reveal that the quality and quantity of the appreciation have been poor.

The stock has appreciated only by 17% in this instance. It has also fallen as high as 40% in one instance. It is hard to believe that someone would risk such a large loss for such a low return. Understanding market trends is crucial.
 

Trend analysis is the term for an analysis of market trends. The key element of technical analysis is the 'trendline.
 

Take a look at

image 3

• TENDLINES:

  It is crucial to be able to identify a trendline in order to do effective technical analysis. A trendline is the line connecting all the peaks and troughs on a stock chart. Charting the stock's growth over time can be done by a trendline connecting the peaks.
   

  The trendline connecting the peaks and troughs can help you monitor the stock's risk. To see the overall trend over a certain period of time, you can use any combination of these trendlines. Combination or two trends is a Channel.. In a later section, we will examine trendlines more closely.

• MARKET VALUE SOMETIMES MAY NOT APPROACH INTRINSIC VALUE :

  Almost every investors have different return expectations and risk appetites. They can adjust their portfolios to meet these needs by understanding the stock market trends. You might want to invest in long-term safe stocks if you're investing for retirement. Stocks that provide reasonable growth and don't suffer from sharp price drops are the best stocks to invest in. You can pick moderately upward-trending stocks by performing technical analysis of stock trend trends.
   

  You might have different preferences if you're a young investor. This would allow you to take more risk. You would then use your knowledge of market trends to identify stocks with a large increase in peaking. You may be willing to accept a slight decrease in the number of troughs in return.