Pretend you’re a florist. You own your own shop. You sell all sorts of flowers in dozens of arrangements. You also carry ferns, bamboo palms, spider plants, and other potted plants.
Perhaps it’s February 7th. You notice an increase in customer orders for red rose bouquets. That’s good because the farm you get your red roses from had a lot this year. Perhaps your customers say that it’s okay if their deliveries take a couple of days.
Move forward to February 13th. The red rose rush has really picked up. You get more orders for next-day pickup or delivery. You also get a little more foot traffic from in-store customers, who snap up a lot of your red rose inventory.
Finally, advance to February 14th. Same-day delivery orders have gone up a lot. So have same-day pickup orders. And you’re getting a stampede of in-store customers, most of whom seem a little panicked. Your red rose supplier has to make a couple of runs to your place of business because you can’t get away. It winds up being your busiest, highest-revenue day of the year. Those red roses turned into some serious green.
The next day, February 15th, red rose orders plummet. You get a few orders for chrysanthemums and Boston ferns. But the rose rush is, for now, history. You knew it wouldn’t last, though. Over the next few months, business is much less brisk, but still respectable.
Back to reality. You’re likely not a florist in real life. Even still, you probably know the cause of all of that movement in your hypothetical red rose inventory: Valentine’s Day, February 14th.
A week before, your forward-thinking customers started ordering red roses in advance. The day before, some customers figured that they’d better order roses fast, so they chose next-day delivery or came to the store in person. On Valentine’s Day itself, you got a rush of customers who had forgotten it was Valentine’s Day until a few minutes before. They bought up all of your inventory in fits of dread and most of them bought in person. The day after V-Day, business returned to its less exciting normal.
What you’ve done — in a very simplistic but real way — is business trend analysis. You understood the underlying factors of your red rose boom. You figured out which market factors and consumer behaviors drove sales. You knew why you and your supplier had to adjust for the rush.
Excellent work! Now, let’s do some stock market trend analysis!
What is Stock Trends Analysis?
Stock market trends analysis is how investors estimate a stock’s future performance and price changes.
It’s an examination of historical data and market factors that move stocks up or down. Stock market analysis helps you to recognize legitimate, long-term patterns and trends. It also exposes more freakish, insignificant events with little impact.
Investors use stock market trends analysis to guide their decisions. Depending on their trading approach, they assign a weight to short-, medium-, and long-term trends. They use a combination of factors for analysis. They evaluate their stocks’ competition. They survey market factors that affect various business sectors. They clarify the fundamental and technical strengths of the companies they examine. And they look at current market “psychology” to spot trends that may be around the corner.
Stock trend analysis involves many tools and resources. It draws on reams of data and metrics. Some of these factors may seem complex and time-consuming. But conducting stock market trends analysis is crucial to building a winning portfolio. And it’s never been more accessible to retail investors than it is now.
How Stocks Trend Analysis Can Help You
Improved knowledge is the main benefit of stock market trend analysis. Through analysis, you become more accustomed to the forces and patterns that move the market. This helps you to determine the best points at which to buy and sell shares.
Stock market trends analysis can also help you spot patterns. Through analysis, you can learn how to detect potential trouble on the distant horizon. You can also spot forthcoming developments that could help the companies that you invest in.
But most of all, stocks trend analysis can make you a better, more competitive investor. It gives you an edge that the majority of retail investors don’t have. It helps you to react more quickly and mindfully and make better decisions in your investments.
How do you do it? Let’s take a look at some of the most integral parts of stock market trend analysis and how to execute them.
Focus on Specific Market Segments for Stocks Trend Analysis
You might be inclined to start your trend analysis with individual stocks. That’s certainly something you’ll want to do at some point. But as a first step, you should consider taking a broader view.
To begin, identify the market segment you’re interested in. This could be one of the 11 market sectors that the stock market is broken down into — IT, industrials, communications, consumer staples, and so forth. It could also be one of the specific industries within these sectors. For example, you may focus on the utility sector as a whole. Alternatively, you might focus on specific utility industries, like gas, electric, or water.
You can get even more granular about your focus segment. You can look at only U.S. companies, or foreign ones. You can choose to look at big companies with a lot of market value (large-cap companies) or smaller ones that are still on the rise (small-caps). Just keep it broad enough to make trend movements meaningful to you.
Evaluate Factors That Affect a Market Segment’s Performance
Once you’ve picked your market segment, find out what usually influences its performance.
Let’s take the energy industry as an example. Supply and demand traditionally affect the energy sector, but that’s true of all sectors.
Other factors are unique to the energy industry. Government regulation (and deregulation) is one of the most impactful factors. Which current and impending laws might affect energy business operations? Pipeline construction, environmental laws, price controls, and other things may play a big part in your analysis.
Oil production rates can also have a direct impact on energy sectors — not necessarily just for oil, either. Slowdowns can make oil prices move, but they can also affect alternative energy stocks. Prices and tariffs on imported and exported oil can be significant. Transportation, weather, technology advances, strikes, plant accidents, and other factors can be significant, too.
Whatever market segment or industry you consider, determine what forces typically change its performance. Supply and demand should definitely be one of your main criteria, but look past that, as well. Learn what events have shaped your segment in the past. Then keep an eye out for news or reports on events that may put those forces into motion across your segment.
Be sure to factor in “market psychology” when you can. Remember our flower shop example? On Valentine’s Day, customers rushed to the store. That’s because they were nervous and scared about disappointing their partners’ expectations. It may have even affected their decisions about how many roses to buy.
Stock traders aren’t much different. They make transactions based on sentiment, herd mentality, panic, and other psychological conditions. This is not always rational, of course. Emotion shouldn’t play a part in your personal investment decisions. But knowing how others are affected by market psychology is good for trend-spotting. Just be as objective as you possibly can.
Look at the Segment’s Overall Performance
Stocks trend analysis compares performances on a timed basis. The unit an investor uses will depend on their investment strategy. Day traders may concentrate on micro-movements in prices over days, hours, or even minutes.
But data that’s frequently updated doesn’t always work well when it comes to finding trends. You’re looking for more established, long-term patterns. That kind of information shows more clearly in year-to-year comparisons. Monthly performance can show that data to a lesser extent, too.
Take another look at our flower shop. Business sank sharply on the day after Valentine’s Day. The florist would have been the first person to tell you that would happen. But someone looking at a month-to-month chart — without knowing what months it covers — might think the business was heading down the tubes after the 14th. And they wouldn’t know why.
That’s why annual performance is better for finding trends and predicting the future. Instead of assessing February and March of the same year, you’d compare February this year to February of last year. That’s a more accurate forecast of an upward and downward trend. It suggests how the florist’s shop is developing and growing (hopefully) as a business.
It’s the same way with stock market segments. Monthly data, as well as 100- or 200-day charting, is always valuable for long-term investors. But annual data shows that trending that isn’t necessarily affected by brief, seasonal factors. It shows where the overall market may be headed.
All data is useful to investors. But especially for trend-spotting, long-term information is more valuable. Check out year-to-year performance metrics before all others.
Use the Right Tools for Stocks Trend Analysis
Now that you know what you’re looking for, which stock market trend analysis tools should you use to find it?
That’s the beauty of modern retail investing. You have far more access to information than generations before you did. All info is not necessarily equally accurate or objective, but you still have several valid options for finding your data.
If you have an online brokerage account, you may already have a trove of metric gold at your fingertips. Fidelity, Schwab, TD Ameritrade, Merrill, and other household names have reams of stock data to sift through. You may not even have to have an account with them to see the things that you need to look at. If you trade with one of the more modern investment apps, see what kinds of data support they offer.
Events that transform the stock market can happen at any time. It’s always worth having a reliable media source at your immediate disposal when they do (emphasis on the word “reliable”). Sites like Yahoo! Finance, MarketWatch, Bloomberg, Reuters, and The Wall Street Journal fall under that definition. As for TV, CNBC and Fox Business — despite occasional lapses into media-friendly hyperactivity — cover breaking stock news well. Look for news about earnings reports, regulations, stock splits, and relevant current events.
Stock screeners make it easy to view clumps of relevant information on companies using filters you set. Finviz has one of the best stock screeners, but there are many others out there, too. You can sort companies by market cap, sector, industry, price, earnings date, volume, and lots of other filters.
You’ll have a massive amount of statistical data to rifle through, but stock indicators are the most valuable when it comes to trending. Most brokerage sites can display information that’s specific to your sector’s performance. Some of the most relevant charts are moving averages, relative strength indices (RSI), standard deviations, and average directional indices. There are hundreds more. Take time — lots of time — to learn what all these indicators explain.
How to Determine Whether a Trend is Valid
Stock price movements are easy to see on paper. Trends aren’t always so simple. To determine whether the things you’re looking at are real trends or a temporary bump or fall, follow a few simple stocks trend analysis tips, which include:
Look at the Right Number of Data Points
Point-A-to-point-B price movement doesn’t indicate anything. To effectively spot a trend, you’ll need at least three data points. Statistical experts suggest using seven or eight data points to constitute an actual trend.
Establish a Time Frame
As we mentioned earlier, yearly or monthly data gives a broader view of ongoing trends. 100- and 200-day charts are common in the stock business. You might have a special need for weekly, daily, or hourly charts.
Look at Directional Movement
Over extended periods of time, you’ll be able to recognize whether a stock or sector is rising, falling, or leveling out. That can be used to show the direction of a possible trend, whether a market’s growing, contracting, or staying the same.
Keep an Eye on the Slope
The more steeply that a performance indicator moves (up or down), the more likely it is that it will point to a valid trend. If it remains relatively level over the long haul, it probably doesn’t point to a trend.
Gorilla Trades: Reliable and Profitable Stocks Trend Analysis
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