Market trend is the general direction that a financial market is moving over a period of time. There are several different types of trends that traders can spot and analyze, including upward, downward, seasonal and more. Analyzing the strength, sustainability and potential reversals of a trend can help you turn signals into strategy so that you’re not just keeping up but staying ahead.
Trends are shaped by many factors, including the overall market sentiment of traders and investors. Optimistic attitudes can drive prices higher, while negative emotions can lower them. Government policies, including monetary and fiscal ones, can also affect market trends by speeding or slowing growth, which in turn has a direct impact on cyclical and defensive sectors.
Identifying a market trend is based on past price action and involves using technical indicators like candlestick patterns and moving averages to spot impulsive or corrective moves. Drawing lines known as trendlines can also be helpful, as they connect a number of price points and extend out into the future to predict where pricing may encounter resistance (a kind of ceiling) and support (a kind of floor) in the future.
Market trends can also be classified by their timeframe – primary trends last over a year, secondary trends correct for weeks or months against the primary trend, and minor trends depict daily fluctuations. Long-term traders, such as position traders, will look to capture primary trends to earn their profit targets. Short-term traders, like swing and day traders, may look to capture secondary trends lasting days or weeks, while contrarians may seek to profit from an impending reversal in the opposite direction.
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