DEFINITION of 'Trend Analysis'
A trend analysis is an aspect of technical analysis that tries to predict the future movement of a stock based on past data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. There are three main types of trends: short-, intermediate- and long-term.
BREAKING DOWN 'Trend Analysis'
Trend analysis tries to predict a trend such as a bull market run, and ride that trend until data suggests a trend reversal, such as a bull-to-bear market. Trend analysis is helpful because moving with trends, and not against them, will lead to profit for an investor.
A trend is the general direction the market is taking during a specified period of time. Trends can be both upward and downward, relating to bullish and bearish markets, respectively. While there is no specified minimum amount of time required for a direction to be considered a trend, the longer the direction is maintained, the more notable the trend.
Trend analysis is the process of trying to look at current trends in order to predict future ones and is considered a form of comparative analysis. This can include attempting to determine whether a current market trend, such as gains in a particular market sector, is likely to continue, as well as whether a trend in one market area could result in a trend in another. Though an analysis may involve a large amount of data, there is no guarantee that the results will be correct.
Using Trend Analysis
In order to begin analyzing applicable data, it is necessary to first determine which market segment will be analyzed. An example of sectors can include a focus on a particular industry, such as the automotive or pharmaceuticals sector, as well as a particular type of investment, such as the bond market. Once the sector has been selected, it is possible to examine the general performance of the sector. This can include how the sector was affected by internal and external forces. For example changes in a similar industry or the creation of a new governmental regulation would qualify as forces impacting the market. Analysts then take this data and attempt to predict the direction the market will take moving forward.
Trend following is a trading system based on using trend analysis and following the recommendation produced to determine which investments to make. Often, the analysis is conducted via computer analysis and modeling of relevant data, and is tied to market momentum.