Trend
What is a 'Trend'
A trend is the general direction of a market or of the price of an asset, and trends can vary in length from short to intermediate, to long term.
As a general strategy, it is best to trade with trends, meaning that if the general trend of the market is headed up, you should be very cautious about taking any positions that rely on the trend going in the opposite direction. A trend can also apply to interest rates, yields, equities and any other market that is characterized by a long-term movement in price or volume.
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BREAKING DOWN 'Trend'
The trend is your friend. This is rule of law for many traders. Following the trend is one way traders attempt to predict the future direction of an asset’s price.
Trend Analysis
By definition, trend analysis is based on historical price movements. As a result, it may seem to fit best under the jurisdiction of technical analysis. Technical analysis looks at historical trends and changes in price to determine the future direction of prices. By contrast, fundamental analysis looks at changes in the performance of an asset, such as earnings or revenue. That said, fundamental analysts can also look for trends in earnings per share and revenue growth. If earnings have grown for the past four quarters, this represents a positive trend. However, if earnings have declined for the past four quarters, it represents a negative trend.
Trend Lines
One tool traders use to identify a trend in stock price is the trend line. It is a line drawn between the high and low point for a stock over a period of time. If the stock price goes up from $10 to $20 to $30 over a three year period, the analyst can plot a line from $10 to $30 starting in year one and ending in year three. The first year marks the first plot in the series, it is the baseline price of $10. The second year represents the beginning of the trend at $20, and the third year marks the continuation, or possibly the end of the trend, at $30. In this way, trend lines can be used to either predict the next data point along the trend or look for a reversal of the trend.
Trend lines can also be used to form a channel marked by two lines. One line is created by trends in the highs for the stock. Another line is created with trends in the lows for the stock. The price is then expected to trade in a range between these two lines to form a channel.
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