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In this guide, we’re taking a look at market trends, their types, explain how to identify them correctly to spot a good buying or selling opportunity.
Beginners, novices, and even professional traders often lookout for the current trend to determine whether to buy/sell an asset or take the backseat. And this goes to show how important the study of market trends is in technical analysis.
Market trends are every investor’s friend. Imagine an investor who holds their positions while riding an uptrend until there is a sign of weakness in the trend. Identifying market signs or trends correctly would help them to make an informed decision, take profit, and savor their gains.
So let’s take a closer look at what these trends are and how to identify them.
Primary markets consist of the bull and bear markets. Either of these markets can last between one to three years. The bull market is a period of uptrend where there is a gradual surge in the price of an asset, group of assets, or the market as a whole. In contrast, a bear market is a period of decline in prices or downtrend.
Generally, both terms “bull” or “bear” denote the market sentiment at a particular time. And a surge of at least 20 percent from the current peak or trough, signals a bear or bull market. On the other hand, it is believed that these terms were derived from the behavior of bulls and bears in real life. The bulls tend to attack with their horns by moving it upwards while the bears attack by moving their paws downwards.
Secular Trends: this type of trend may be evident between one to three decades. And it consists of several primary trends. This trend is also easy to spot due to the extended time it lasts.
Intermediate-Trends: primary trends consist of several intermediate trends. This trend does not go unnoticed since it is often accompanied by a market trading in an opposite direction compared to its performance the previous day or week. That being the case, sudden spikes or change in directions denote the intermediate trends. The spike or sudden movements can largely be attributed to political or economic news that has impacted on the market.
Based on past performance, rallies that occur in bull markets are powerful even though the reaction is weak. Contrastingly, rallies in a bear market are short whereas the reactions in such a market are strong.
Needless to say, research reveals that whether it is a bull or bear market, at least three intermediate cycles will tend to occur. On the same note, an intermediate cycle might be evident between two to eight weeks.
Investors in assets including stocks, cryptocurrencies, etc. rely on stochastic indicators to ascertain the long-term trend of an asset. Coupled with that, the rate of change (ROC) is relied upon as a momentum indicator with ten days often being used as the standard time frame for the ROC measurement.
Rate of Change = 100 (Y/Yx) is used to denote the ratio to build the ROC indicator. In the equation, Y stands for the asset’s most recent closing price, whereas Yx signifies the closing price for a certain number of days.
It, therefore, follows that stock the price of which closes above what it traded at ten days ago will have a ROC value point that is above equilibrium. The reverse is the case if the stock’s price closes below its closing price ten days ago. Here, the ROC value point will be below equilibrium as an indication of falling prices. Consequently, occasions where the ROC rises, are translated as a bullish signal in the short term. Alternatively, when the ROC is falling, it gives off a bearish signal.
Consideration is also given to the period while calculating the ROC. In this case, a period between 26 to 52 weeks may be used for the long term analysis, while between ten days to six months may be used for a short term analysis. Changes in the period also help an analyst to better understand the trend’s direction and its duration.
Good knowledge of how to identify market trends can help investors to spot a good buying or selling opportunity. An investor’s ability to identify these trends can also result in immense gains. Consequently, you can fall back on the strategies outlined above to discover the current market trend.