Definition: Trend Analysis is a statistical technique that tries to determine future movements of a given variable by analyzing historical trends. In other words, it is a method that aims to predict future behaviors by examining past ones.
What Does Trend Analysis Mean?
Trend analysis is a technique employed by technical analyst in the financial industry to predict the future movements of a given asset. They employ historical data to determine the direction of the trend. The goal of this procedure is to identify attractive investment opportunities that are currently showing an upward trend; and of course, to identify downtrends too, so investors can get out before losing money.
Perhaps one of the disadvantages of trend analysis is that past behavior is not always consistent in the future, in other words, whatever the price of a given security did in the past is not necessary an indication of what it will do in the future because there are a lot of other significant elements that come into play when it comes to determining the value a financial security.
Here’s an example.
Mr. Nolan is a Financial Analyst at Duck Financial LLC. He is currently analyzing the historical stock data of a company called Black Sea Petroleum LLC. The company’s stock price has been increasing on a daily basis for the last 7 days, by 0.02% a day. Mr. Nolan determined that this is an uptrend, since in the past, whenever the company has had this increases the uptrend has endured for more than 3 months.
This is an example of how trend analysis work. By analyzing the historical behavior of the stock the analyst can gather evidence to issue an opinion and to predict future movements of the stock price. By doing this, an investor can make the decision of investing in Black Sea Petroleum LLC stocks because there’s a potential gain in the transaction, according to the analyst opinion.