A trend is a pattern that emerges in the data points of an asset or a market, and it can be discerned through visual representations like charts. Identifying trends and trading with them can make or break a trader’s profit margins. A major key to success is being able to spot trends early and open positions before they reverse, but it is also necessary to understand what shapes and sustains these patterns.
Trends are generally created and sustained by fundamental factors of the underlying financial asset, as well as market sentiment. For example, stocks may rise due to increased company revenue and profitability projections, or they may experience strength in currency markets due to the underlying country’s economic growth and employment. However, trends can also be fueled by human emotions like fear, greed and confidence, which can influence market participants’ behavior and drive market momentum.
For instance, when a new clothing shape is popular, it can be categorized as a fashion trend and marketed by designers. One such recent trend is the boyfriend-shaped clothing, which has seen a significant boost in popularity thanks to the royal wedding and a desire among women for larger, thicker and more comfortable garments. A theme, such as feminism or social justice, can also inspire a trend and help a designer to shape their product line. The high-neck lace dresses by Alexander McQueen worn by Kate Middleton in the royal wedding were a perfect example of this, and Dior read the room well when they released their “We Should All Be Feminists” t-shirt collection in 2019.
While it is important to be able to recognize and trade with trends, it is equally as valuable to know what to look out for when a trend turns against you. Traders can identify downtrends by drawing a trend line between three high points and observing whether the trend line is pointing up or down. A downtrend will be characterized by ever lower swing lows and higher swing highs, while an uptrend will be characterized by the opposite.
It is not uncommon for a downtrend to turn into a bull run, as traders see the reversal in the trend and step in to buy or cover their short positions. However, a downtrend is not likely to continue for long, and most often will turn into a bear run at some point when the trend is overturned by negative market sentiment.
Whether you are using data from the stock market or your business’s customer database, it is crucial to be able to spot trends early on in order to maximize profit margins and improve marketing campaigns. To ensure that the insights you gain are reliable, be sure to choose an appropriate time frame and intervals for your analysis and carefully clean and preprocess your data before using it. Also, be sure to use data visualizations to present your findings clearly and effectively, so stakeholders can easily grasp the meaning of the trend you are identifying.
