Trend Analysis is a statistical technique that tries to determine future movements of a given variable by analyzing historical trends. In other words, it is a method that aims to predict future behaviors by examining past ones. Trend analysis is a technique employed by the technical analyst in the financial industry to predict the future movements of a given asset. They employ historical data to determine the direction of the trend. The goal of this procedure is to identify attractive investment opportunities that are currently showing an upward trend; and of course, to identify downtrends too, so investors can get out before losing money.
Types of Trend Analysis
Trend analysis is computed using numerical data. This information is usually historical data, either traditional data in the form of a company’s performance taken from its public financial statements or alternative data, such as the number of job postings of a competitor in the past five years. When adding numerical data to a chart, you will be able to identify three types of trends.
Upward trend (bull market)
An uptrend or an upward trend means that your data points are increasing. Based on what type of variable you are examining and your purpose, this could have different meanings.
For instance, you are a business owner looking at the price of raw materials required to produce bread, and you notice that the price is increasing. This information could help you make different predictions, such as increased costs for your business or the necessity of raising the prices for the final consumer.
At the same time, an investor looking at the share price of company X who noticed an upward trend might decide to buy the stock since the price is increasing. An upward movement in a stock’s price generally indicates a favorable condition, helping you to determine if the stock is a worthwhile investment.
Downward trend (bear market)
On the opposite side, a downward trend indicates the decreasing value of your variable. For example, if a company’s profit has a sharp decline, this may require investors to proceed with caution as the stock is risky since the price is going down. This also applies when other economic or financial variables have a downward trend.
When investors research financial assets, trend analysis can be done on the asset’s historical data. If this price is decreasing, it indicates the presence of a bearish market. In other words, investment is not recommended because the prices could further decrease, leading to a loss.
Finally, the horizontal line indicates stagnation. In other words, the prices, or any other metrics, are not going up or down; rather, they are stagnant.
In practice, a flat trend might go up for one period, then pull a trend reversal, reaching a steady general direction overall. Making investment decisions based on horizontal trends is risky because you do not know what will happen. However, if you decide to go with it, a sophisticated revenue and cost analysis regarding the sales regions must be implemented to calculate the risks.
Classification of Trend Analysis
The most common way to classify the various types of Trend Analysis is usually based on the method used. These methods are divided into Temporal, Geographic, and Intuitive. Let's talk about it.
This type of methodology is used to analyze patterns and trends of a given group of data or objects of study in a specific cohort of time, as well as its change in that period.
A clear example of this type of study is a longitudinal study with the clear intention of detecting and analyzing trends that arise.
It is mainly used in ethnographic research and other types of event-focused studies. The great disadvantage of this type of trend analysis is that it is exposed to many variables that could affect the final result of the study.
The geographic method is generally easy and reliable; it can be the means to identify commonalities and differences between user groups belonging to the same or different geographies.
The main purpose of the geographic method is the analysis of trends that develop in groups of users identified by their geographic location.
The downside of the geographic method is consequently the geographic limitation for data analysis, which can be influenced by factors such as culture and traditions that are specific to the geographic location of user groups.
The intuitive method is a type of trend analysis implemented to analyze trends within groups of users based on logical explanations, behavioral patterns, or other elements perceived by a futurist.
It is helpful for prediction-making without the need for large amounts of statistical data. However, some issues with the methodology are the overreliance on knowledge and logic provided by futurists and researchers, which makes it prone to become biased to its researcher.
The intuitive method is the most difficult type of trend analysis and might not be as precise.
The Importance of Trend Analysis
- The trend is the best friend of the traders is a well-known quote in the market. Trend analysis tries to find a trend like a bull market run and profit from that trend unless and until data shows a trend reversal can happen, such as a bull-to-bear market. It is most helpful for traders because moving with trends and not going against them will make a profit for an investor.
- Trends can be both growing and decreasing, relating to bearish and bullish market
- A trend is nothing but the general direction the market is heading during a specific period. There are no criteria to decide how much time is required to determine the trend; generally, the longer the direction, the more is reliably considered. Based on the experience and some empirical analysis, some indicators are designed, and standard time is kept for such indicators like 14 days moving average, 50 days moving average, and 200 days moving average.
- While no specified minimum amount of time is required for a direction to be considered a trend, the longer the direction is maintained, the more notable the trend.