What is a Trend Analysis?

Trend analysis provides a means to analyze company data over a period of time by focusing on the change in specific line items within the income statement and balance sheet.

This tool is used with the assumption that history always repeats itself, and that the exact time of this repetition can be predicted. 

How isTrends Analysis Used in Company Performance?

Trend analysis evaluates an organization’s financial information over a period of time. 

Periods may be measured in months, quarters, or years, depending on the circumstances. The goal is to calculate and analyze the amount change and percent change from one period to the next.

Amount of change = Current year amount – Base year amount

The only way to gauge the true significance of a change is to calculate the percent change. The percent change is calculated as the current year amount minus the base year amount, divided by the base year amount.

Percent change = (Current year amount – Base year amount) ÷ Base year amount

Trend analysis is often used to evaluate each line item on the income statement and balance sheet. 

This analysis points to the reason we perform trend analysis—to identify the increases and decreases in dollar amounts from one year to the next and to take a close look at unusual trends.

A common approach is to establish the oldest year as the base year and compute future years as a percentage of the base year. 

Trend percentage = Current year ÷ Base year

How is a Trend Analysis Used in Financial Trading?

Trend analysis is the act of using past and present market trends to predict future movement patterns. It is considered a part of comparative analysis, where two details from a market are compared to bring out a future result.

Trend analysis in financial trading aims to predict market movements, like a bear run (more selling than buying), and uses this trend for trading till a reversal occurs. Reversals mostly occur at a resistance (the highest point which a trend can reach before bouncing back) or a support (lowest point where a trend can reach before bouncing off). 

The movement of the market within a specific period of time is called a trend. Trends can differ depending on the type of market at that period. 

Trends are of three different types; short trends, long-term trends, and scalp or swing trends (Trends used in analyzing future patterns for more than a month but less than three months).

• Trend lines aim to predict (although most traders would say the word predict is over used) market movement like bull market runs (a period filled with high-buying activities), and made use of that pattern, till a reversal (resistance levels) to a bear run (period of high-selling activities).
• The motto for this tool is that history repeats itself
• This tool is mainly focused on short, scalp, and long-term trading.

Markets are separated into bullish and bearish market, two terms for defining high buying and selling periods respectively. 

Trend analysis works better when a given trend has occurred for a long amount of time. The longer a trend occurs, the stronger it becomes, and the more chance it has of staying that way. 

 Experienced statisticians are able to use this tool to determine if a market will continue in its current pattern, or reverse to the opposite pattern. It is also helpful in comparing stocks in two markets like the London Stock Exchange (LSE), and the New York Stocks Exchange (NYSE). 

It is important to note that no matter how good a system can be, it is highly incapable of providing perfect future predictions at all times. Thus, investors should understand that this system is also accompanied with risks.

Types of Strategies in Trend Analysis

Analysts, as well as traders, are only aiming for profits when making use of trend analysis in a market. Indicators are very important parts of trend trading, as they help to determine the next pattern of a market. Examples of these indicators include:

• Moving Averages (MACD): This indicator suggests buying (also known as long in the market) when sell MACD crosses over a buy MACD. On the other hand, it involves selling (also known as short) when a sell MACD crosses under a buy MACD.
• Momentum Indicators: The Relative Strength Index (RSI) is the ideology of momentum indicators. Traders are advised to create new trades depending on the nature of the momentum (i.e., strong or weak momentum).
• Trend Lines and Charting Patterns: This strategy involves placing trades when a security is trending in either direction and placing a stop-loss (an automatic order to the broker which allows him to remove you from a trade if you are losing more than you can afford) or a take-profit below and above a support line and a resistance line respectively.

Related Topics

• Trend Analysis of Financial Statements
• Common-Size Analysis (Vertical Analysis) of Financial Statements
• Common-Size Financial Statement
• Net Dollar Retention
• Horizontal Analysis
• Per Share Basis
• Profitability Ratios
• Gross Margin Ratio
• Profit Margin
• After Tax Profit Margin
• Return on Assets
• Total Shareholder Return
• Cash on Cash Return
• Earnings Per Share
• Diluted Earnings Per Share
• Asset Turnover Ratio
• Berry Ratio
• Break-Even Analysis
• Liquidity Ratio
• Current ratio  (Working Capital Ratio)
• Working Ratio
• Quick Ratio
• Quick Assets
• Days Sales Outstanding
• Cash Ratio (Operating Cash Flow Ratio)
• Receivables turnover ratio (often converted to average collection period)
• Accounts Payable Turnover Ratio
• Inventory turnover ratio (often converted to average sale period)
• Solvency (Coverage Ratios)
• Leverage Ratio (Debt Ratio)
• Asset Coverage Ratio
• Debt to Equity
• Debt to Income Ratio
• Debt Coverage Ratio
• Times Interest Earned
• Market Capitalization
• Price to Equity Ratio
• Book-To-Market Ratio
• Price to Earnings Ratio
• Price to Earnings Growth (PEG) Ratio
• Price to Earnings Growth Payback Ratio
• CAPE Ratio
• Price to Cash Flow Ratio
• Capital Maintenance
• Book to Bill Ratio
• Asset Turnover Ratio
• Plowback Ratio 
• Days Inventory Outstanding
• Days Payable Outstanding
• Days Sales Outstanding
• Non-financial Performance Measures: The Balance Scorecard