Market Trend refers to the movement of an Asset’s prices in a particular direction for a specific period of time. Here is everything you need to know about Market Trends. Typically there are 2 types of trends seen in the market.
1. An Uptrend (an increase in prices) is marked by successive higher highs and higher lows and is seen in a Bull Market.
2. A Downtrend (a decrease in prices) is marked by successive lower highs and lower lows. It is seen in a Bear Market.
Bull Market
Bull Market refers to a market trend in which the prices of an Asset are rising. It involves making higher highs and higher lows. There is no universal definition of a Bull Market. However, when prices have increased 20% or more after a downswing the market. It is said to have entered a Bullish Phase.
Investors start to believe that prices will continue to rise. The demand for securities becomes higher than the supply, resulting in a further rise in prices. Consequently investor behavior, known as Investor Sentiment, becomes more and more positive and helps to feed the Bull Market Rally.
A classic Uptrend or Bull Market, often consists of 3 Up Waves with 2 Pull Backs (PB) or Corrective Waves in between. The market rallies, Up Wave #1 goes higher, stalls, then Pull Back (PB) #1 occurs retracing a percentage of Up Wave or Leg #1, without going lower than the beginning of Up Wave #1. Next is Up Wave #2 in which prices rally higher than Up Wave #1 and make a new high. Prices stall and Pull Back #2 begins with prices retracing a percentage of Up Wave #2 without going lower that the bottom of Pull Back #1. The market turns and rallies an additional time, Up Wave #3, taking out the previous high of Up Wave #2. Higher highs and higher lows are one of the main characteristics of an Uptrend or Bull Market.
Bear Market
Bear Market refers to a market trend in which the prices of an Asset are falling. It involves making lower highs and lower lows. A Bear Market typically has begun after prices have fallen by 20% or more from recent highs amidst negative Investor Sentiment. The market is said to have entered a Bearish Phase.
Investors start to believe that prices will continue to fall. The demand for securities becomes lower than the supply, resulting in a further fall in prices. Investor Sentiment, becomes more and more negative and helps to feed the selling pressure on the market.
A classic Downtrend or Bear Market, often consists of 3 Down Waves with 2 Pull Backs (PB) or Corrective Waves in between. The market drops, Down Wave #1 goes lower, stalls, then Pull Back (PB) #1 occurs retracing a percentage of Down Wave or Leg #1, without going higher than the beginning of Down Wave #1.
Next is Down Wave #2, in which prices fall lower than the bottom of Down Wave #1 and make a new low. Prices stall and Pull Back #2 begins with prices retracing a percentage of Down Wave #2 without going higher than the top of Pull Back #1. The market turns and drops an additional time, Down Wave #3, taking out the previous low of Down Wave #2. Lower lows and lower highs are one of the main characteristics of a Downtrend or Bear Market. When prices do not fall, investors enter the state of irrational exuberance where they become so confident that security prices will continue to rise.
Expert Tip:
There are several methods and indicators Investors can use to help identify when an Asset is in an Uptrend or a Downtrend. Here are a couple of the more widely used indicators: A Trendline can be drawn by connecting successive price lows or highs by making a straight line. When the angle of the Trendline is rising and prices stay above the Trendline. Consequently we can say that the market is in an Uptrend, falling and below, in a Downtrend.
A Simple Moving Average (SMA) is calculated by using the closing prices of an Asset for a time period, say 50 days, and adding them together. The resulting number is then divided by the number of time periods, 50. This eventually produces a price point which is plotted with the previous 49 to create a curving line on a chart. To calculate the SMA on a daily basis you replace the oldest number with the most recent closing price. When the angle of the 50 Day SMA is rising and prices stay above the SMA. We can conclude that the market is in an Uptrend, falling and below, in a Downtrend.
These are but two of numerous types of indicators and Moving Averages. These may be utilized alone or in combination to help an Investor determine the trend direction of an Asset.
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