Market Trend

Updated on April 1, 2024
Article byRutan Bhattacharyya
Reviewed byDheeraj Vaidya, CFA, FRM

Market Trend Definition

A market trend refers to the direction of an asset’s price or market over a certain period. Analyzing the overall direction enables investors and analysts to spot potential changes in the market or an asset and capitalize on the opportunities to generate profits.

Market Trend

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When a chart utilized for technical analysis shows a sequence of higher highs along with higher lows, it is an uptrend. On the other hand, charts showing a number of lower highs and lower lows signify a downtrend. Such trends apply to markets where the trading volumes and prices fluctuate. There are different market trends, like intermediate and minor.

Key Takeaways

  • Market trend refers to the general direction — sideways, upwards, or downwards of a market. By conducting efficient market trend analysis besides extensive research, one can make trading decisions that can help generate financial gains.
  • Some popular technical analysis tools traders or analysts may use to spot a trend are the moving average, relative strength index, and the Aroon indicators.
  • There are different types of trends in financial markets, for example, intermediate, minor, secular, and primary trends.
  • Some key factors influencing trends in financial markets are supply and demand, market sentiment, and government policy.

Market Trend Explained

Market trend refers to the general direction of a market or any asset’s price. With its help, individuals and organizations can predict whether there might be a shift in the market. Accordingly, they can use their funds to place buy and or sell orders and make a profit. Rising data points represent a bull or upward market trend, and falling data points or lower swing lows and lower swing highs mark a bear or downward market trend. Note that if one finds the points between strong resistance and support levels, it is a sideways trend.

To understand how this concept works, one must know the factors that result in a market’s overall direction. Hence, let us look at such factors:

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#1 – Market Sentiment

Market sentiment among the different participants can shape the trend. When the traders and investors are optimistic, it leads to the formation of a bullish trend. That said, a negative sentiment can result in the formation of a downward trend.

#2 – Demand And Supply

A trend in financial markets has a tendency to fluctuate owing to the alterations in the dynamics concerning supply and demand. This is highly relevant for the commodities market. For instance, if an economy is flourishing, crude oil demand rises, leading to an increase in the price of oil. This, in turn, results in an uptrend.

#3 – Economic And Corporate News

While positive corporate or economic news can contribute to an uptrend, negative news may push prices downward, leading to a downtrend.

#4 – Government Policy

Utilizing monetary and fiscal policies, governments can influence the trend in financial markets. For instance, an adjustment made to the interest rate of the central bank can impact economic growth as it will have an effect on defensive and cyclical sectors within the economy.

Types

The different types of trends in financial markets are as follows:

The duration of such trends can range from various weeks to several months. The alterations in investor sentiment and technical factors define such trends.

These trends may last from several years to multiple decades. The demographics and structural changes within an economy shape secular trends. An example of such a trend is the current switch to sustainable energy.

These can last from a few years to many decades. Economic and political events, besides alterations in business cycles, drive such trends.

A minor trend can last up to a few days. Typically, increases and decreases in the trading volumes and current news shape them.

Such trends can last up to a few weeks. Dynamics concerning demand and supply and the volatility in the market drive them.

How To Identify?

Individuals can identify trends in financial markets using technical analysis tools. Some popular ones are as follows:

#1 Relative Strength Index Or RSI

The RSI tool determines if an asset is oversold or overbought by gauging the magnitude and speed of the changes in price.

Let us look at this chart to understand this concept better. 

Source

 In the above Bitcoin/Tether chart, we can find that the RSI values have not exceeded 70. Hence, there was no indication of overbought conditions. On the other hand, one can observe that on March 19, 2024, RSI values dropped below 30, indicating oversold conditions. When this indicator shows an oversold reading and a higher low corresponding with the lower lows in price materializes, a positive divergence occurs.

#2 Aroon

This technical analysis indicator can help identify the trend of a market. Also, one can use it to spot any change in trend. The indicator has the ‘Aroon down’ and the ‘Aroon up’ lines. The former measures the downtrend’s strength, while the latter gauges the uptrend’s strength.

Let us look at this US Dollar/Singapore Dollar chart to develop a clearer understanding of this concept. 

Source

As we can observe in the above chart, the Aroon down (red) and Aroon up (green) lines keep fluctuating between 0 and 100. The values near 100 signal a strong upward trend. On the other hand, values close to 0 signal a weak trend. As we can see, the Aroon up value was above 100 on May 18, 2022, and the chart showed a strong uptrend. 

#3 Moving Average Or MA

They are of two types and help smooth out the price data through the creation of a continuously updated average price. Rising moving averages indicate that markets are in an upward trend while declining moving averages indicate a downtrend.

The Polycab India Limited stock chart below can help one understand the concept better. 

Source 

The backward-looking line represents the 20-week simple moving average. It acts as the resistance signal here, indicating that traders holding the stock may consider exiting their position. 

#4 Trendline

Trendlines are straight lines connecting a sequence of price points — lows and highs, extending into the future.

Note that besides identifying the general direction of a market, one must carry out extensive market trend analysis along with thorough research to generate significant returns and fulfill their financial goal. Also, remember that people can utilize fundamental analysis to spot a trend. It involves looking at key financial metrics, such as earnings growth and revenue.

In the case of an upward trend, generally, traders focus on purchasing to generate profits from the continuous increase in price. On the other hand, in the case of a downtrend, traders concentrate on shorting or selling to minimize losses that result from the continuous price decline.

Let us look at this Euro/US Dollar chart to understand trendlines better. 

Source

The chart above shows a downward-sloping blue line that passes through the three lower highs. This line denotes a downtrend, showing the price has been decreasing over a certain period. During this period, traders could make significant profits if they opted for effective short-selling strategies. That said, people who already held a position could minimize their losses by opting for an exit. If individuals wish to see more such charts to gain more knowledge regarding the identification of market trends, they can visit the official platform TradingView.

Examples

Let us look at a few market trend examples to understand the concept better.

Example #1

Suppose David is a stock trader who aims to generate returns by making the most of short-term trading opportunities. Suppose he was tracking the XYZ 50 Index, an index that included the top 50 stocks in terms of market capitalization. Using a trend line, David identified an upward market trend in the technical chart of the index. Then, he used the Aroon Up indicator to measure the strength of that uptrend.

Once he determined that the uptrend was likely to continue, he purchased shares of five of the top 10 companies in terms of market cap, the price of which had surged significantly in the past few days. His decision turned out to be correct as the prices surged higher. He was able to make significant financial gains after he sold the assets before their price dropped again.

Example #2

On Tuesday, September 26, 2023, Jeff deGraaf of Renaissance Macro Research brought everyone’s attention to the United States stock market’s recent downturn. It has declined after recording its high at the end of July 2023. Particularly, the S&P 500 has been subject to scrutiny owing to its waning upward trend and one-of-a-kind 65-day low, which could indicate a bearish shift.

Per deGraaf’s analysis, the trend of defense against cyclical stocks could be a potential indicator of the shift.

Frequently Asked Questions (FAQs)

1. Why are market trends important?

Identifying and analyzing market trends can help individuals predict the price movements of assets, such as bonds, stocks, and commodities. Based on their predictions, they can buy assets or sell/short them to generate gains or minimize losses. Analyzing the trends can also give an idea regarding the associated risk.

2. What are the disadvantages of following market trends?

Some disadvantages of following trends in financial markets are as follows:
– Lots of false breakouts occur 
– Traders may not generate profits every time; the hit rate could be low
– Riding a trend can be challenging
– Trend-following strategies might be subject to long durations of underperformance or drawdown.

3. Is the downward market trend good or bad?

In financial markets, people can make money from downtrends as well as uptrends. In other words, whether it is good or bad depends on how a trader uses it. It is common for traders to sell or short securities and make financial gains as various market participants start panic selling.

This article has been a guide to Market Trends and its definition. Here, we explain the topic in detail, including its examples, types, and how to identify it. You may also find some useful articles here –

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