Trend and its analysis

In simple words, trend refers to a general direction of price. This direction is established when majority of the market participants tend to agree with the direction. This direction can be bullish (upward), bearish (downward), or neutral (sideways).

Analysis of the trend is important to plan upcoming trades. Trend analysis is an important concept because it gives the trader information that the trend will continue to be bullish or bearish unless there are signs of reversal. As a trader or investor, riding these trends is the point.

Ways to analyze trend

Now that it is established and understood that trend is important, how does one analyze the trend and predict the direction?

There are two ways to analyze trend:

1. Price structure

2. Moving average

Price structure is a simple concept derived from the Dow theory. It says that if the trend is bullish, the price will form structures that resemble Higher Highs and Higher Lows. Think of it like a stairway while going up. When the trend is bearish, the price will form structures that resemble Lower Highs and Lower Lows. This is a stairway when going down.

A more simplified way of trend analysis

Moving Average (MA) is a trend indicator. Indicators are a tool which are a derivative of price. Moving Average is the average of a specified number of data sets. The data set is usually the closing price. Although, the range can also be used. This tool plots a line that represents the average. There are many types of MA: Simple MA (SMA), Exponential MA(EMA), Weighted MA (WMA) etc.… 21 candle EMA is a great setting for candlestick charts.

As a trend indicator, MA is used as follows:

• Price trading above MA is in Bullish trend

• Price trading below MA is in Bearish trend

The logic behind this is simple: If price is trading above the MA, it shows that there is demand for the instrument at price levels above the average closing price. If price is trading below the MA, it shows that there is supply of the instrument at price levels below the average closing price.

Although 21 candle EMA is used here, 50, 89 and 200 candle MA can also be plotted depending on the holding period of the individual.

MA can be plotted on Noiseless charting methods such as Renko and Point & Figure.

If you found this Newsletter helpful and educational, do check out this video where I explain MA in detail.