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How to analyze market trends and its Causes

The trend shows the overall price of an asset and the direction where the market is going. If you are focusing on technical analysis, you should put more focus on trendiness. You can identify uptrends if you see a higher swing high and a higher swing low in the price. At the same time, if there is lower swing lows or lower swing highs, it means it’s a downtrend.

Track distribution day for analyzing uptrend

A distribution day significantly identifies hefty selling by many institutional investors. Moreover, it indicates the heavyweights that are mainly responsible for the market’s direction. Four or fifth distribution days usually point to whether stocks have stopped or are heading towards a downturn. Visit etf for more information

Now, the market can withstand six or seven distribution days, so you need to track everyone one of them. Fortunately, a distribution day does not leave a permanent scar in the market. There are three ways these days can fall off the count. One is by a calendar, i.e., after 25 sessions, a distribution day ends and falls by one.

The second way to distribution day to fall off is when the index rises to 6% on a day to day basis. The index increases from its close on the same day the higher-volume loss appears. Depending upon the problem, a bull market is said to be great for curative.

The third way is even more painful. Distribution day becomes a debatable point as soon as the broad market takes place. Sometimes a high distribution day foreshadows that correction. However, once the market falls into a correction, a big question arises when the market will regain its uptrend.

Thus, when the day finally arrives satisfying the uptrend, the distribution day starts clean at zero.

Follow-through process using solid market rally

After you have seen a clear-cut downturn, it will immediately try to rally. But analyzing the initials days of an attempted upswing will not lead you to any conclusion that it will be a success or not. So, it is advisable to wait for the follow-through days for a strong confirmation of the market’s new uptrend.

You will see the follow-through session to start from between the fourth and tenth day when there is a boom in one of the indices, i.e., upto 1.7% to 2%. In this market situation, follow-through provides strength to the first stock that moves to a new high ground out of sound chart bases on large volumes. These stock then acts as the new leaders in the upcoming bull phase. They are more likely to rise than any other stock because of the added strength.

It is easier to identify these upcoming new leaders by confirming uptrend from follow-through; otherwise, you will not be able to locate them. Moreover, you have to be on your toes to make a prompt decision. These new leading stocks continue to evolve into a proper pattern for three months.

Learn to trade uptrend and downtrend stocks

You might be wondering what the process of trading in an uptrend and a downtrend stock is. They are as follows:

Use a medium to screen stock trends

It can be challenging to identify a trend. Thus, it is advisable to have a proper medium or app to screen stock trends. There isn’t a single uptrend stock screener tool or an appropriate find downtrends now button as such.

Downtrend and uptrend indicators

There are many indicators of uptrend and downtrend. Some of them are:

Higher highs and Lower Lows Indicator

Traditionally the people used to look for higher highs or higher lows to identify uptrends. This was the case mainly because investors were active and quicker in buying on dips. They were also driving up the prices.

However, during downtrends, the low tends to be lower, and the highs are also lower. Its mainly because there are too many sellers and minimum demand, leading to price down. Similarly, when the sellers get motivated to sell off their stocks, and there aren’t many buyers, the highs become low.

The ways through which you can find out the trend are:

  • Line graph
  • Moving averages
  • Trend lines
  • Average Directional Index

Trade volatility and volume

No matter how strong the trend indicator is, you cannot decide based on the peaks and troughs. It is essential to consider volatility and volume as well.

By volatility, we mean how fast the price of the stock is moving. The more rapid is the movement, the greater is the stock’s volatility. Penny stock has the most volatility; it’s because the companies are smaller and less proven.

You need to check the volatility in price as it helps you make a profit as a trader. But it is also the leading cause behind why stocks are becoming so risky.

But when we say volume, it means the number of the share on trade each day. It has a significant effect on stock liquidity.

Don’t opt for a big trade.

When you are trading with trends, size is a significant factor.

Seeing the trend, you might get tempted; you may feel that the trend is too strong but never risk too much on one trade. The advice becomes even more appropriate if you are a beginner and have a small account. The temptation of risking everything to earn more can turn into a bad habit. Moreover, the short account you are risking can evaporate quickly into nothing.

Keep learning

Trading is not something that you can memorize through one or two transactions. There are no definite facts or systems to master. The market is a vast living beast, and it does not have any control, it can go anywhere, so it’s better to stay on your toes. You have to be active in knowing what is happening and where the market is moving. The best way is never to stop learning, educate yourself throughout your trading career.

Trends can be difficult to understand. It is good to gather as much information as possible to understand the market movement properly. Keep a close and regular check of the trend to avoid any loss. Remember to keep all the other factors of trend also in check.

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