What Exactly Is a Trend?
A trend is the price movement of a market or an asset in its overall direction. Trendlines or price action in technical analysis emphasise when the price is making higher swing highs and lower swing lows for an uptrend, or lower swing lows and lower swing highs for a downtrend.
Contrarians look for reversals or trade against the trend, while many traders trade in the same direction as the trend. All markets, including stocks, bonds, and futures, have uptrends and downtrends. In statistics, trends can be seen when monthly economic data grows or lowers from month to month.
Traders can spot a trend using technical analysis techniques such as trendlines, price action, and technical indicators. Trendlines, for example, may depict the direction of a trend, whereas the relative strength index (RSI) is intended to represent the strength of a trend at any particular period.
Trends play a central role within Technical Analysis, and are defined by the progression of consecutive high and low points (or peaks and troughs) made by the market over a period of time. This gives rise to 3 types of trend:
Uptrend
An uptrend is a directional market move characterised by higher high points and higher low points, as illustrated in the following chart below:
Downtrend
A downtrend is a directional market move characterised by lower high points and lower low points, as illustrated in the following chart below:
Sideways Trend
A sideways trend is a non-directional market move characterised by similar high points and similar low points, as illustrated in the following chart below:
No matter how simple or how sophisticated the market may be, prices will always follow one of these three trends, the identification of which forms a key part of the technical analysis every trader performs. Identifying the highs and lows within a particular trend also allows traders to see where major points of resistance and support may lie, and where large buyers and sellers are likely to get involved.
Important points to remember
A trend is the general direction of a market’s, asset’s, or metric’s price.
Rising data points characterise uptrends, such as higher swing highs and lower swing lows.
Falling data points indicate a downtrend, such as lower swing lows and lower swing highs.
Many traders choose to trade in the same direction as the trend in the hopes of profiting from the trend’s continuation.
Price action, trendlines, and technical indicators are all instruments that can be used to detect a trend and alert traders when it is about to reverse.
