Trends or market trends refer to the tendency of the financial market to move towards a certain direction. Often you will see investors in the share market hunting for stocks that are moving in a specific direction which can be either upward or downward.
Trends can be classified as Secular trends, Primary trends and Secondary trends. The classification is done based on for how long a trend lasts in the market and investors usually identifies these trends by using technical analysis. Before explaining the types of trends, we need to learn a bit about two very important terms that are frequently used in the stock market: Bull Market & Bear Market.
A Bull market refers to that particular scenario of a financial market where the confidence of the investors is on the rise and that they continue to increase their investments in the market with the anticipation that a price increase will take place in the future. As far as the stock exchange is taken under consideration, the bullish trend often begins before clear signs of recovery appear in the general economy. This is more like a win-win situation for the traders.
Bear market refers to the opposite scenario of the bull market where the market is experiencing a decline for a certain period of time. In such cases the traders become very wary about the market and turn rather pessimistic due to the sliding share price.
Classification of Trends
Secular Market trend
The Secular market trend is the long-term trend that usually lasts for 5 to 25 years and includes a series of sequential primary trends. The secular bear market involves smaller bull markets and lager bear markets while on the other hand the secular bull market involves larger bull markets and smaller bear markets.
Primary Market Trend
The Primary market trends are those trends that last for about 12 months or more.
And finally, the Secondary trends are the ones that involve short-term changes which occur within a primary trend. Secondary trends may last for a few weeks to months. These short-term trends can be divided into two categories: 1. Market Correction & 2. Bear Market Rally.
The “market correction” refers to a short term reduction of price of about 5% to 20%. The correction is a downward movement which is not large enough to be called as bear market. On the other hand, the “bear market rally” is the one that involves a rise in the market price by as much as 10% to 20%. The bear market rally cannot be considered as a bull market since it is not large enough.
Market Top refers to the situation where the financial market hits its highest point for sometime which is followed by a decline. The decline starts to happen gradually but gains its pace later on. The market usually stays at the highest point for a few years before it starts to slide.
The market bottom is the reversal of the trend where the market hits the bottom and then starts to climb back. It is not that easy to identify a market bottom when it takes place. In many cases, the market may start declining again after gaining for a short period of time. These scenarios can be quite devastating for traders who bought stocks during a “false” or misperceived market bottom.
The Ideal trading Approach
To some investors, trading is all about going “long” during the times when the market is moving up and going “short” when it is sliding. But according to experts, this type of trading strategy is nothing but a process through which an investor may end up broke real fast. This is why many investors rely on pinpointing the trending shares that are moving towards a certain direction and trades consequently.
Often traders rely on the trend indicators like 5, 20, 100 and 200 day moving averages in order to identify the trend and to decide the right time for buying or selling. However, it is recommended by the experts that you should avoid short-selling during the market gains and buying during the downtrend since identifying the top of an upward moving trend or bottom of a downtrend is very difficult.
The toughest challenge for an investor in this approach is to identify the shares that are trending in a particular direction as the market often moves without much of a direction or ranges in a tight bound.Glossary List
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Top 150 Public Companies Listed on the Australian Stockmarket as at 29/05/2009
- BHP Billiton
- Westpac Banking Corporation (WBC)
- Commonwealth Bank of Australia (CBA)
- National Australia Bank (NAB)
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- News Corporation (NWS)
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- Santos Limited (STO)
- AMP Limited (AMP)
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- Foster’s Group Limited (FGL)