Posted in Marketing and Strategy Terms, Total Reads: 432
Definition: Trending Market
When prices move in one direction, either upward or downward, such markets are referred to as Trending Markets. The graph for trending markets can be plotted by “higher highs” and “higher lows” during uptrends & “lower lows” and “lower highs” during downtrends.
Analysis of trending markets requires lagging indicators. Some examples of lagging indicators are:
• Simple moving averages
• Weighted moving averages
• Exponential moving averages
• Moving averages convergence divergence(MACD)
For analyzing trending markets, as long the uptrend or the downtrend remains intact, the above lagging indicators tend to keep the analyst in a trend and thus help in predictions.
To determine, whether a market is trending or not, the above mentioned indicators can be used. Apart from these, two more indicators can also be helpful:
• ADX: known as Average Directional Index indicator. This indicator determines whether the market is trending or not with the help of pre-defined values, ranging from 0-100. Values more than 25 usually indicate that the market is trending and the prices are moving strongly in one direction. So, greater the number, the stronger is the trend. Some disadvantages of using ADX can be:
a. It is a lagging indicator, that is, it cannot be used to predict the future.
b. It is non-directional indicator, that is, it will only give a positive result, irrespective of the fact that the market is up-trending or down-trending.
• Bollinger Bands: This indicator is generally used for range-bound strategies. The Bollinger bands contains the standard deviation formula, and thus measure the deviation of prices from the norm, which in turn is a feature of trending markets.
A market is said to be trending during a particular time-period, that is, for either the short-term, mid-term or long-term. Trending markets hold importance for technical analysis as they are supposed to happen with some amount of regularity and predictability.