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Economic Trend Analysis

 
     
  On this page you will learn about the important subject of Economic Trend Analysis: how trend analysis relates to economics.

 
 
     
 
 
     
 
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Understanding trend analysis: What is the cause of economic trends?

Trend analysis is as crucial in stock or bonds trading as it is when you trade forex online. In fact, trend following is a general strategy used by all kinds of traders in almost every kind of market, usually with very healthy profits. Very few traders would choose to ignore the study of this lucrative, popular method which has followers among novices, professionals, and even billionaires.

It is true that most traders have an idea of what trends following is, the same cannot be said when it comes to the real reasons behind trends. Are they created by technical factors? Is there a difference between long and short term trends when they are analyzed according to their causes? And what is the benefit of knowing about the reasons behind a trend? Can’t we just focus on exploiting the technical phenomenon for profit, while ignoring the fundamental dynamics behind the developing formation?

 

In the short-term, it is often very hard, if not impossible to determine the cause of a developing trend. On five-minute, or hourly charts, the causes behind a trend are usually apparent only after the formation has fully developed. Speculations are of course possible with hindsight, but since they do not provide much forward-looking value, the analysis of causes in short-term trading is usually of little practical value. The short-term noise often masks the real dynamics of a trend. Micro-trends can of course be created by news-releases, sudden infusions of new money, or numerous other factors that disrupt the market equilibrium forcefully, but it is often the case that by the time a trader is confident about the cause, the trend has already dissipated.

In the longer term, on the other hand, causality can be a great profit multiplier for a trader, and it can also boost his confidence greatly allowing much greater profits than it would otherwise be possible. It is commonly observed that the price action establishes very recognizable, strong, and profitable trends over the long-term the causes of which are easily identified factors related to government policy, the attractiveness of a nation to investors (or the opposite), political stability or turmoil, expected anticipation or depreciation of a currency, along with many other different scenarios. In all these cases, the identification of the main drivers of the price action may result in greater average lifetime for each profitable trade, and often much greater profits.

What should do the trader do to incorporate economic trend analysis and causality into the complex calculations of forex strategy and technical analysis? He needs to remain up-to-date with day-to-day market events. He must seek an analytical approach to events, so that existing price patterns can be matched to existing long-term fundamental dynamics which will then allow the holding of long-term positions and trades. There is no question that an understanding of causality can be profitable for traders of all persuasions, be they technical, fundamental, or hybrid players. It is the trader’s task to maximize his advantage by understanding the causal relationships between long term price trends, and the fundamental state of an economy.


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