When a market is 'bullish' or 'bearish' it follows a certain trend. Let's dive deeper to understand market trends, how they function and why they’re important.Watch our engaging and easy-to-understand video from the #LearnWithUpstox series to know more about market trends and their details.
Welcome back to a new blog of ‘Learn with Upstox’. Trend is your friend, until it bends! True. But to make the most of this wisdom, one must understand what trends are.
Now we all know that there is an up-trend, a down trend, a sideways trend. Delving deep into the understanding of it helps decode the market. Before we do that, we must understand the movement of it, the ascents and the descents of it. Which can be done by analyzing the trending moves and the pullback points, as the market always moves in wave’ patterns.
What we observe here is that the market never moves straight but always moves zigzag. And the ones who understand this, understand the market better and benefit from it.
It is of utmost importance that an investor or a trader understand the trend of the stock market. Let’s try and understand it technically by first understanding uptrends.
Uptrends:
An uptrend or a rising trend describes the movement in price of a stock, index or any financial asset when the overall direction is up. Which makes it a Bullish market. And it always follows a zigzag pattern.
The graph helps us compare the lows and the higher lows & highs and the higher highs. It is this very formation of higher low and higher highs that is called an uptrending market.
Downtrends:
Similarly, the market that continuously forms a structure of lower lows and lower highs is termed as a down trending market. The line on the graph that connects all high points is called the trend line. Trendline shows the movement of prices of stocks over a period of time. In a down trending market, a trendline connecting highs provide resistance. Similarly, in an up-trending market the trendline connecting highs would provide support.
Sideways Trend:
A sideways market is called a range-bound market or a choppy market, and sometimes also known as a consolidating market.
When a market goes up and down, and repeats, and goes up and down again, forming an almost horizontal line touching the high points or the low points, the market is known as a sideways market. The nature of this horizontal line is such that after the fall of the market, at the support point, the market is going to go up. In other words, at the resistance point there is always a good opportunity to take a short trade.
So basically, in a sideways market, one usually buys or sells on the horizontal lines’ resistance points and the support points, while in the up or down trending markets one buys or sells on the trending lines, or the trending movement of the market. If it’s an uptrend, buy on support, and if it’s a downtrend, sell on resistance.
Let’s have a look at an example for its practical approach.
In the above scenario, we realize seeing the high points, the higher highs, the lower lows and the lower-highs, that it is a zig zag pattern that eventually is down-trending. If you analyze closely, you will see that the market was trending upward before going downward. What caused it? The trend changes or like some people call it the trend shift.
Remember, we discussed at the beginning that a market will always progress in a zigzag manner. If it needs to fall, it’ll never fall all at once, it’ll go up then down and will form a new resistance. A lower high! And from there on, it starts going downwards. Shown above, is a classic example of how a trend shifts or changes, and how the concept of highs and lows work.