Even though daily activity for any tradable can be volatile and confusing to the average investor, the trend of price and volume are often a clearer representation of the underlying valuation beliefs present given the fundamental and economic factors that contribute to expectations of future performance. When trend changes, it is an indication that underlying valuation beliefs have changed and so predict a change in future price trend. Useful tools for identifying trends in technical analysis include the moving average line. This is an average of prices over a period of time. It is moving because with each new day that is added to the calculation, the earliest day is dropped so that a 9 day moving average is always the average over 9 days but moves with each day's activity.
Traders construct longer term moving averages to help identify longer term trends.
Using two moving averages together, one short and one longer, can provide a trend following system for verification of changes in the price trend. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets. All rights reserved.