What is Trend?
In simple words Trend is tendency to move in a particular direction. In relation to Stock market trend identification is very important for trade setup. People often say you should trade in direction of trend.
Now if you want to do that then you will have to identify the trend first. Once you have identified the trend you can make next step. In this chapter we will discuss types of trends. That will help you understand these concepts better.
Trend can be short term and long term. Long term trend are more powerful than short term trend. We will see more details in next section.
Types of Trend
There are 3 types of trends. These are
- Positive Trend
- Negative Trend
- Sideways Trend
Below image shows all the three trends for HDFC stock recently. I have explained each trend below so that you can understand the terms better.
1. Positive Trend
The line termed as 1 is positive trend. You can see that stock prices are moving upwards with time. The closing prices are gradually moving upwards after each couple of trading sessions.
Note after few positive closing you may see one or two negative closing. This is understandable as few people book profit. In case of HDFC the positive trend started from mid May and continued till August (leaving last few days).
2. Negative Trend
Negative trend is just opposite of positive trend. The prices come down gradually. If you see HDFC started downwards movement from last few days of August.
Note every trend positive or negative may have some days of consolidation after which trend may continue. In this case you can see sideways movement of stock prices for some trading sessions (more on sideways trend later in this article).
HDFC had sideways movement in negative trend this time for trading session between last days of August and beginning of September. After this sideways movement the downward movement of stock started again.
3. Sideways Trend
People often focus on Positive and negative trend. They ignore Sideways trend. But it is also very important. Sideways trend signifies whether the positive trend will reverse or continue.
After every positive and negative trend there will be consolidation in prices. Trend reversal cannot happen without sideways trend. Reason is simple.
Lets assume there is negative trend. People sell in panic. After few trading session some think prices are low and start buying. Many people still fear from the fall and on every rise they sell again.
Due to this stock prices move in range for some days. It may rise and fall on subsequent trading sessions. This phase is consolidation phase or Sideways trend.
After this people may start buying thinking prices will not go down or start selling thinking prices will not go up. So sideways trend should be looked with care.
Trend is corner stone of Technical Analysis. Most of the tools we will learn in future help in either identifying reversal or measure strength of current trend. People tell you to trade in direction of trend and avoid sideways movement.
The concept of trend is simple yet difficult to understand. There can be long term trend, short term trend. The time period of your trading determines which trend time you should consider.
We will talk about the trend times and which trend to use later in the articles. For now you should know that long term trend are more powerful and generally overcome short term trend.
If the short term trend is powerful enough to defy long term trend then it is called trend reversal.