Is it more than just a wordplay? Many of us venture into investments having minimal experience in the field. Of which, a large part about what we can find out ourselves would be past trends and performance. While that itself does provide you with some security and understanding such as, “if I would have bought at $3, it would have been the cheapest price since 2015.” While this is 100% factual, it does not support nor guarantee the price to trend back to previous highs or even bouncing back. In this post, we will discuss all the misleading understandings about trends and clarify how we can use them effectively when we are doing investment planning.

Trends exposes market confidence (at certain price points)

Say for example the price of a particular counter has been bobbing between $1.00 and $1.20. The analysis that we can make from that is Investors do not feel the share price should be lower than $1 and higher than $1.20. That is it, no further inference should be made from that. However, what happens when the price trends above or below support and resistance? It simply means that some investors, not all of them are “betting” that the price will go up or down respectively from the state of consolidation.

We can extrapolate from the above example of simple, small ranged consolidation to much wider range, uptrend or downtrend consolidation and it will still work in theory.

Trends are affected by market performance

If the economy is extremely bearish or bullish on a certain day, trends might break without reason. This is because the hype in the market regardless of its direction is able to temporarily break support and resistance lines. Since this is temporal, it is unlikely that the trend will break, thus pushing the price back into consolidation after the hype is over. This hype can range from days or weeks even and the truth is that we will never know when it starts and ends. All we can count on is our own analysis of the situation in the market and for that particular share counter.

Past performance is never an indication of the future

Easier said than done, many times we are all manipulated by our confidence in a certain company and therefore we will hold or buy more when it falls. The lesson to learn from this post is to never count on it anymore. Yes, it is true that we will never be completely right however, it is better to be wrong yourself than when following the trend.

Closing Thoughts

Always remind yourself that when a trend breaks, it should be backed by an event, news or rumors. Otherwise, check out Index and foreign indices for some idea on why are shares in your watchlist acting oddly. In recent weeks, STI has been detached from US Indices and the “anti-trend” seems to be continuing. As such, let us all identify the range of consolidation which we are comfortable with, stick to it and identify any future catalyst or events which might push it higher or lower.