To engage in trend analysis means to take current and past data sets to identify patterns that can be used to get a feel for what is going to happen in the future.
I don’t want to use the phrase “predict the future” here, because it’s a bit too strong and no one can really predict what is going to happen with one hundred degree accuracy.
The word “forecast” is probably the best one to use to think about this concept, and you can see how trend analysis is indeed used in weather forecasting, so we will use it.
Weather forecasting is made by looking not only at the current data points of temperature, wind, and humidity, and air pressure, but by looking at past data sets to see how all of these things have been changing and the direction they are now going in.
Then the overall trend can be identified.
Combined with that data weather forecasting is fairly accurate in the big picture.
The same sort of forecasting is done in the stock market by using what financial players call technical analysis.
A financial market forecaster engages in the technical analysis of a stock trend by looking at the price history of a stock on a stock chart.
In the financial world a market player assumes that any trend in motion will stay in motion until it comes to an end.
He seeks to simply align himself with the trend and take profits once it comes to an end.
He may use various leading technical indicators that are computed using the price of the stock in order to detect early signs that the trend is about to change.
Let me show you an example.
Stock Market Analysis Case Study
We can do a gold price forecast for 2014 applying simple trend analysis.
You can see that gold was in a big bull market uptrend until 2011. Then it went sideways and went into a big price trend decline in 2013 until the summer.
It has since been going sideways.
All bear markets come to an end – and often after they end a market will go sideways for several months.
This suggest that in 2013 we can forecast higher prices for gold.
Of course there are more complicated things to look at I’m just scratching the surface for you.
There are plenty of market timing books you can read to learn more.
I’d suggest though that you get my technical analysis PDF, which outlines the number one pattern I have used a professional stock market investor for over ten years.
I call it the Two Fold Formula and even if you are not going to trade stocks yourself it will help you understand how trend analysis works in the financial world.
Begin by going below.