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Stock Analysis, IPO, Mutual Funds, Bonds & More

Trend is your friend: How to spot emerging trends

Despite best efforts of regulators, price-sensitive information comes to stock market slowly.

, ET Bureau|
Updated: Mar 13, 2019, 11.30 AM IST
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Sideways trend occurs when the market is indecisive.
Earlier, we explained the first rule of technical analysis – i.e. ‘price captures everything’. The second rule states that ‘price moves in trends’. Though stock price movements look like random, these trends can be segregated by doing detailed analysis.

1. Why price moves in trend?
Despite best efforts of regulators, pricesensitive information still comes to stock market slowly. First, it reaches insiders, then to the circle close to them, then to analysts and big investors and finally to the general public. Since this transmission takes time (i.e. this can vary from few hours to several days), the price movement will also be slow. In several cases, the news may be fully priced in before it hits the market and that explains the muted price action despite big news like jump/fall in net profit, etc hitting the market.

2. What are these trends?
These are uptrend, downtrend and sideways trend. Sideways trend occurs when the market is indecisive. Uptrend occurs when positive news comes to the market slowly and downtrend occurs when negative news comes to the market. If you can spot the emerging trend for a stock right at the beginning, you can make money by participating in an uptrend or downtrend without even knowing the fundamental reasons behind it.

3. How to spot trends?
The best way to spot an emerging trend is to study the historical price patterns and compare it with the current ones. Since people usually react in a similar fashion when faced with similar situations, the price patterns generated in the past get repeated in the future. And this is the third rule of technical analysis: ‘history tends to repeat itself’.

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