Factors That Influence Stock Market Trends
Stock market trends provide invaluable trading insights for speculators and investors alike, and for the most part represent a large part of market analysis and research. Trends indicate patterns of movements, or trajectory in graphs, which traders can use to try and predict where the markets might be heading next. Remember that in trading it only takes the slightest trend or the slightest movement in the markets to generate capital growth (particularly when dealing in leveraged instruments), so this ability to spot and trade on stock market trends can be worth potentially serious money. In order to become a trend master, it’s important first off to understand why trends emerge in the first place and the factors that combine to determine the direction of this market momentum.
Why Do Trends Emerge?
Trends emerge in markets all the time largely as a result of the mentality of traders. Traders move in flocks, and when it looks as though the market is going to fall traders are quick to get behind this momentum. Traders, and in particular the large institutional investors, affect the price by buying and selling incrementally, so these trends can often become self-fulfilling prophecies, perpetuating further momentum in the markets. These trends present opportunities for traders to generate significant returns on their investment, and can be prompted by a number of factors, both internal and external to the markets themselves. These factors that influence stock market trends, therefore, lie at the heart of what momentum is all about, so it pays to keep a close eye on events to help you second-guess emerging trends.
The price of a market can be a major factor that influences a trend. Markets tend to have an inherent value that is not necessarily reflected by the current market price – while in theory the markets establish a perfect price, this is not always necessarily equal to value, creating conditions of under and overpricing. Where a price is too high or too low to prove sustainable in the long term, trends will emerge in favour of a correction in the price. Similarly, where the value of an asset is rising (say, through becoming more scarce or through growth), price trends will be hauled up to meet this value, and the same can be said on the reverse side of the coin. For these reasons, market price and pricing data can be a significant force in establishing and weighting market trends.
Markets & Psychology
Another key factor that influences trends is the psychology of traders, and the behaviour of the markets in the round. Where a couple of traders lead, many more can follow, and momentum can be quick to gather pace in financing markets (particularly when traders fear losing their capital), The psychology of trading can dictate the average behaviours of a market at any one time, with moods of pessimism and optimism playing a major role in how the markets for a given security will shape up. On the more tangible side, supply and demand changes in the underlying market for a security will drive its price in either respective direction, with the potential to cause trends over both the short and longer terms.
Economics and world goings on are also extremely influential in setting the tone for the financial markets, with economic news seen as being intrinsically linked with share performance. Bad news will probably lead to bad results for publicly traded companies, and while an over-simplification, this highlights the kind of thinking that goes on in putting economic health so centrally at the heart of stock market trends.
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