Knowing
the market direction is very important as everyone keeps coming with the
questions: ‘will the market rise?’ or ‘will the market fall?’
What?
Market direction is referred to as trend. Wherein, a
stock moving upward is in upward trend, and a stock moving downward is in
downward trend. There are times when stocks reach no trend zone or sideways, this happen because as soon
as market go up it forces a situation of supply and market fall down forcing a
situation of demand coming in.
Types
of market trend
Technical analysis theory classifies market trend on two
grounds: market direction and time period. On the basis of ‘market direction,’
a trend may be upward trend stock market trend, it is better if one buys more
shares. This is because the price is expected to rise in the future. So, one
can profit at a higher price in the future. Another term for upward trend is
bullish trend. Downward trends are conducive to selling one’s existing holding
of a stock, they are also called bearish trend. This is because the price is
going to fall further. And, if one is buying in the market, he or she may want
to wait before the price falls further. ‘Time period’ is classified on the
basis of time series that can be traced back to the articles that Charles H Dow
wrote in the Wall Street Journal between 1900 and 1902. According to it, three
types of market trend exist: primary trend, secondary trend and minor trend.
The primary trend, this is the longest and most important trend because it has
the ability to influence the other two. A primary trend generally last for one
to three years, it can go beyond that time also. Unless there is a clear sign
of a trend reversal the primary trend is considered to be the main trend. In such
case, peaks would be constantly higher than previous ones. Similarly, a primary
trend may also be marked by a constant fall in prices for multiple years. The secondary
trend, this is a temporary price movement in the contrast to the primary trend.
Suppose stock prices constantly moved up for a period of 2 years, however,
during these 2 years, there was one phase during which stock prices constantly declined
for three months, this is called secondary trend. Similarly, if the primary
trend is a fall in stock prices, the secondary trend would be a short term rise
in stock prices. It is generally observed that each primary trend contains many
secondary trends within it. A secondary trend is a weaker trend than a primary
trend because it cannot reverse the primary trend, and last for a small time period.
And the minor trend is a phase within a secondary trend. In other words, it is
a short movement that is contrary to the direction of the secondary trend. It
lasts for an even smaller duration, few days to a week. All the three stock
movements give useful information about stock prices, but only primary and
secondary are important.
Identifying
trends
Knowing the market trend is all and good but what good is
that knowledge when one cannot identify these market trends, which leads to
loss of money. Another important point to note is that – ‘it is easy to pick
some stocks in an upward trend but the real benefit comes when one knows when
is the right time to exit the investment.’ Primary trend, say an upward, is
marked by an upward sloping graph, with increasing tops and bottoms. If this
continues to happen, it is an indicator of a primary uptrend, and conversely, a
downward sloping graph, with lower peaks and lower bottoms is an indication of
a primary trend. However, the beginning of a primary trend is hard to trace.
The reason is that it will always be opposite to the dominated trend, i.e. an
upward trend will always come after a long downward spell, and a downward trend
will always come after a long upward spell. This confuses investor who thinks
it to be a secondary trend and not a new primary trend. For example; suppose
that the market is in the middle of a long period of falling stock prices,
observing this the investor concludes that it is a primary down ward trend and
all of a sudden peaks starts rising, the investor thinks that it is a secondary
upward trend. Spotting a secondary trend is similar; it is basically primary
trend in reverse. Only thing to consider is that – whether it is due to a
temporary secondary trend or a longer new primary trend.’
Other
ways of predicting prices/market movements
Fundamental analysis is also a widely used analysis to
predict stock prices, in it, it is important to consider factors like debt,
book value, EPS, etc. Some investors rely on P/E ratio. Another is volume
breakout, it means sudden spurt in the traded volume of a stock. If the
increase in volume is accompanied by the increase in price of a share then it
indicates a bullish trend. Moving averages: simple moving averages and
exponential moving averages are also helpful in predicting stock movement.
These parameters show whether the stock is trading in a range or has given
price breakout. Derivatives is also another way of predicting, this is
speculation in nature. In this one should check both futures and options. Many
use the candlestick patterns to predict stock market price movement. Investor
sentiment is also used for prediction. A market; comprises of investors and
traders, balances buyers and sellers, so it is impossible to literally have
more buyers than sellers or its exact opposite. The investor; owns a stock for
many years, follows a buy low and sell high strategy, while a trader; owns a
stock for several weeks down to seconds, attempts to mirror the investor’s action,
i.e. buy when they are selling and sell when they are buying. A surge in demand
for investors’ lifts the trader’s ask, while a surge in supply hits the
trader’s bid. When a high proportion of investors express a bearish sentiment,
one may conclude it to be a strong signal that a market bottom is near.
It
is not straight forward
A question arises – ‘why aren’t more people making more
money in the financial market?’ This is because people are motivated by greed
when buying and by fear when selling. So people formulate scenarios based on
their emotional state which prevents them from realizing that ‘their main drive
is emotion.’ But having said that, trying to predict the market’s next move
helps, as it gives one some directional edge which is necessary in every
situation, by picking or assuming which way the market is going to turn or it
will continue in the same direction.
