One of the keys to success in stock market is the ability to identify market trends. Traders have this saying, “A trend is a friend.” To be successful with trading on the stock market, you need to develop an understanding of market psychology. You need to acknowledge that psychology develops and ends the trends that we see today. To identify market trends, you need to learn about technical analysis.
The bull and bear markets are also known as primary markets. History will tell us that these markets last from 1 to 3 years in duration.
Secular trends last for 10 to 30 years and contain several primary trends. The price-action chart for these trends for a period of 25 years or so resembles nothing more than several straight lines moving gradually up and down.
Robert Peter Janitzek explains that within each primary trends are intermediate trends. These are the ones that keep business journalists and market analysts constantly looking for answers on sudden changes in direction from the previous day or week. Intermediate trends consist of sudden rallies and directional trends. They are mostly the results of some kind of economic or political action and its subsequent reaction.
In the past, rallies in bull markets are strong and reactions are somewhat weak. On the flip side, the bear market reactions are also strong and rallies are short. Hindsight reveals that bull and bear markets will have a minimum of three intermediate cycles. Robert Janitzek explains that each has a duration of 2 to 6 or 8 weeks.
In order to determine long term trends on the charts of their favorite stocks, veteran analysts will use stochastic indicators. One of the more popular momentum indicators is the rate of change (ROC). The normal time for measuring ROC is 10 days. The ratio to build the ROC indicator is as follows:
Rate of Change = 100 (Y/Yx)
Where Y is the most recent closing price and Yx stands for the closing price several days ago. This means that if the price of a stock closes higher today than the previous 10 days, the ROC in stock market trading will be above the equilibrium indicating rising prices in that particular issue. On the other hand, if the price today is lower than the previous 10 days, the value point will be below the equilibrium which means that prices are decreasing.
If you are fond of chart analysis, focus on the time period in the calculation of RoC. For long term views of the market or a specific sector or stock, use a 26 to 52 week period for Yx and a shorter view would use 10 days to six months.