One of the common ways to identify trends in the stock market is through the use of trend lines. Indian stock market experts suggest this to estimate the uptrend and downtrend in the stock markets.
However, do you know that there are more proven ways to evaluate trends in the stock market?
As a novice trader, you should be aware that the stock market has a larger number of trend lines. We expect that you understand the use of trend lines in the market, which makes you one step closer to reading about the proven steps in this blog.
1.1 Determine the price direction through the law of demand and supply
To evaluate the trend of a security or the market, you should first determine the price direction that takes place using the law of demand and supply.
The law of supply states that the supply level activates in levels of resistance, but the law of demand states that the demand level for security grows at a support level.
In terms of equity, the price direction is observed through the law of demand-supply. However, in the options market, the put-call ratio or PCR is used to gauge the market direction, which you'll learn in more advanced blogs.
1.2 Set the price objectives by analyzing a trading range
The trading range can be analyzed by developing the security's support and resistance levels. Thus, setting a price range can also help point out the market's trend.
A trading range occurs when the security develops constant highs and lows to state the support and resistance levels. Then, analysts set the price objectives depending on the stock's worth, fundamentals, and the support & resistance levels.
According to Wyckoff's method books, the law of operation states that the force of accumulation in a trading range develops the subsequent trend to define the upward or downward movement.
1.3 Change in Trend determination for future approach
Recognize the prices of the security to determine the change in trend. The prices make a higher swing indicating the reversal whereas, if a higher low follows it the confirmation is provided for the reversal.
Similarly, if the price of the security is making higher lows and higher highs, it is an indication of uptrend movement. The change in trend can be observed with the proper indication of higher highs, lower lows, and lower highs.
A trader should be able to prompt the forthcoming trend to predict the reversal movement.
1.4 Judge the behavior of the individual stocks
To observe real-time trend change, one must analyze the stock's behavior. If the moving average of the stock increases, the trader should make an entry into the stock. Further, if the moving average decreases eventually, the trader must book the trade or make a short position.
While developing technical trends, one must analyze the stock fundamentals to understand the performance of the stock. It is important that traders know how to identify trends in stock market.
Stock Market Experts say that: don't judge a stock by its price.
Stock must be judged using the long-lasting trend in the price which defines its quality in the market. The longer the trend, the greater the weight to carry. Evaluate the trend through the stock's intention to perform in the market.
1.5 Interpret the motives behind the stock action
A stock price and its action in the stock market hold great importance in deriving the company's overall financial health. Therefore, it is essential to analyze the stock action taking place in the market to understand its background development.
For example, when a publicly listed company issues annual general meeting results, quarterly results, or any other corporate action, it affects the stock price.
A trader should analyze the market's trend by observing the interpretation of the movement and motives behind the stock action. When the motive is clear behind the change of trend in the security, it boosts investor and trader confidence in the market.
1.6 Define the trend using uptrend, downtrend, and sideways trend
After you have justified the stock action using the previous five steps, now, you can define the trend movement using uptrend, downtrend, and sideways trend.
In security, the uptrend can be defined when the stock is making constant higher highs and high lows in the chart. Then, using a trendline you can observe the uptrend movement of the stock.
A sideways market happens when the security price remains in a tight range and is traded within the same range. In this situation, the first step of evaluating trends will be used to analyze the demand and supply consistency. A sideway market trend to have similar demand as to supply.
In the downward trend of security, the price movement will make lower lows and lower highs in the chart. This ensures that the market is in a downtrend movement.
1.7 Carefully Plan, Execute, and Conclude the Trade with Trends
Knowing the evaluation method for trends is not enough if an individual does not implement it in their trading. Implementing the seven steps will help traders plan, execute, and conclude the trade with the knowledge of trends.
A trader can analyze the presence of demand and supply in the security, set the price objective towards clear goals, be prepared for the change in trend, judge the stock's behavior, interpret the motives of the stock, define the trend – uptrend, downtrend or sideways and finally execute the trade by implementing all the plannings.
Knowing the traders can represent the stock's behavior to help reach high-profit potential in the market.
Let's learn some of the advantages of identifying the trends in the market.
After evaluating different trends, it is important to know why you are identifying them. Thus, you need to estimate the advantages of trend identification.
This blog helped evaluate the trend aspects with 7 steps and implementation for professional traders. Representation of trading behavior and price action helps deriving the trend and movement of s security or the market.
Determine the price direction by analyzing the demand and supply
Observe the support and resistance to set price objectives
Analyze higher highs, lower lows, or vice versa to spot the trend change
Spot the moving average to judge a stock's behavior in the market
Be informed about a company's corporate action to analyze its motive in the market
Observe the trend using the uptrend, downtrend, or sideway rule
Finally, plan and execute the trade with trend identification