More about technical analysis and trends

There are many trends on all markets every day that can give the investor insight into the development of security rates and prices of derivatives in the near future. Trends are often an important foundation for strategies used by investors. Who bases activities on a strategy must be able to recognize trends on the market.

This exactly is the skill, since is it never easy to identify tendencies on financial markets. To recognize a trend, investors have to use the technical analysis, also known as the Technical Analysis.

Technical Analysis displays trends

With the bare eye, trends can hardly ever be recognized on financial markets. If an investor has for example observed that the course of stock XY has risen during the past three days, he still cannot know – without further information – whether this is already a trend or only coincidental or short-term development. To obtain better foundation for an assumption investors should always use the Technical Analysis. The technical analysis is based on historical and current data for a particular security or derivative and is displayed in a diagram. Who puts time and effort into this technique should always begin with collecting historical data of the observed rate. The next task is to deduce regularities in course development to help predict future developments of this course.

Short-term, medium-term, and long-term trends in diagram

With the technical analysis not only short-term but also medium- and long-term trends can be recognized. If the rate of a stock has e.g. risen in the past two years with only few small cutbacks, it can surely be considered a long-term uptrend. If investors would rather like to identify short-term trends, they have to focus on recent courses when using the Technical Analysis. In principle, the Technical Analysis can help identifying any kind of trend without problems. Important tools in this context are certain points and lines, such as Support and Resistance Lines.

Technical analysis and trend following

Long-term trends can bring a lot of profit!

Often times trend lines are much steeper, as you can see in Trend Line 2. Often, trends are interrupted by short-term or medium-term trends. The trend represented by Trend Line 3 began in early 2009 with a steep slope (left-hand dotted green line). At the turn of the years 2011/12 the long-term trend was interrupted by a short-term trend (light blue line). After that, the uptrend 3 continued with a slightly flattened slope (right-hand dotted line) and was again interrupted by a medium-term trend (blue line). The third version of Trend Line 3 (marked with bold line) lasted until 2011 and was replaced by a long-term downtrend (4).

Exceeding and falling below defined lines

In practice, Support and Resistance Lines indicate the existence of a certain trend. If a stock price has for example exceeded the Resistance Line and records substantial rises in price now, this is in many cases the indicator for a beginning uptrend. Downtrends often occur in the exact same way, after a stock price has for example fallen below one or more Support Lines. Of course, there are no guarantees that a new trend evolves after exceeding or falling below the defined lines, but the probability of it is fairly high.

Technical Analysis

Classical trend line break-out after a trend with downward tendency

Trend channels allow the trader to observe an incremental increase or decrease in course value over time. Look at it as a limited market (Range Bound Market). Many traders repeatedly place buying orders at the bottom of a channel and will sell at the top of a channel until the rate breaks out of range (Point 1).

Profit from early identification of trends with technical analysis

Recognizing trends is not all about identifying existing trends. The investor can basically profit only when a trend is recognized very early. This timely identification is essential, since an observed sequence with tendency can also be a temporary course development of a few days and is not always a guaranteed trend. If a trend is recognized relatively late, the risk is high that it may be over after only a few days. Speaking in metaphors, the investor would try to catch a train that has departed long ago. If investors manage to identify trends in the early stage and follow them in time, the chances on generating great profits as the trend continues are high. For early identification of trends, many programs have been created to support the Technical Analysis with special observation methods for course development and identification of trends. The investor will be alerted in case of a recognized trend and simply has to react accordingly – which means buying or selling securities or derivatives.

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