Trend analysis involves collecting information over several time periods and displaying the information on a horizon for further analysis. The purpose of this analysis is to discover actionable patterns in the information presented. In business, trend analysis is usually used in the two ways mentioned below. If you use trend analysis to predict the future, factors that previously influenced data points may no longer be analyzed at the same level. This means that extrapolating past time series does not necessarily give a reliable prediction for the future. Consequently, using trend analysis for forecasting must involve a significant amount of additional research.
Type of trend analysis.
Trend analysis is calculated using numerical data. This information is usually historical data, usually traditional data in the form of corporate performance or alternative data such as the number of competitor job postings over the past five years. When you add numerical data to a chart, you can identify three types of trends.
It’s an uptrend.
A bull market is a rise in financial markets and assets and the broader economy, and during this period the price of a stock or asset or even the size of the economy continues to rise. Now it’s a boom when jobs are being created, the economy is moving in a positive direction, market sentiment is good, and the investment cycle begins.
This is a downtrend.
Companies have stopped operations or cut production because of poor sales. A downtrend or bear market is a decline in financial markets and asset prices, as well as the broader economy, and the price of stocks, assets or economic scale continues to fall over time. Jobs are lost, asset prices begin to fall, market sentiment is not conducive to additional investment, and investors rush to a safe haven to invest.
Lateral / horizontal trend.
A sideways / horizontal trend means that asset or stock prices – just like on the broader economic level – do not move in any direction, but go up for a while and down for a while. The direction of the trend cannot be determined. Investors are worried about investment and the government is trying to move the economy up. Typically, a sideways or horizontal trend is considered dangerous because it is impossible to predict when emotions will reverse. Therefore, investors try to stay away from such situations.
Use trend analysis in surveys.
Researchers and companies run trend analysis reports to collect data afterwards.
Understanding consumer behavior: Based on historical data, this helps companies understand what consumers need and what is completely rejected. This helps them make timely changes to the product and push it out of the market. For example, it helps you identify and target customers and make informed decisions in poor market conditions.
To identify changes in consumer perception, follow these steps: Consumer perception of a product or service can be quite volatile. Short-term planning won’t get you too far. Customer satisfaction may vary because of minor changes in business style or product. Trend analysis involves a technical analysis of customer needs and how they perceive the product or service.
To understand cost factors, do the following: Companies should examine the financial aspects of their business, such as stock prices and cost factors that affect products or services, depending on the time period. They need to innovate to develop the best product at a lower price than their competitors. Trend analysis over a period of time can help you identify these drivers. Trend analysis is a handy tool for measuring investor returns.
An example of trend analysis.
Here are some examples of trend analysis to help you better understand this concept.
Sales Patterns: A team of financial analysts can analyze sales patterns to determine whether they are increasing or decreasing and what is causing the change. Sales patterns may change due to new products, new customer bases or specifications in other sales regions.
Expense Reports: Accountants can review expense reports to ensure that all expenses are justified. This helps ensure that the data represents valid market transactions, which can help financial analysts make sound projections and estimates.
Budget Forecasting: Financial analysts can make estimates on revenue and expense items to organize budgets and forecast upcoming results. Budget forecasts allow companies to optimize revenue and free up remaining funds for future downward trends.
Expense Tracking: Financial professionals can look at expense items during the reporting period, which is the month, quarter, or year that accountants create financial reports. This can help examiners determine if there are abnormal expenses that can be studied further.
How does trend analysis work?
By following market developments, traders can match buying and selling of certain stocks to increase their profit potential. At the same time, it’s important to look at historical data about the underlying company’s current position to see if there are factors that could change the stock’s value despite a wide range of market conditions or past performance. For example, traders need to research a company’s financial position, understand markets and technology, and predict competitive pressures on the company in the industry.
Traders benefit from all of these tools and trend analysis.
To begin evaluating relevant data, you must first identify the market segment you want to research. For example, you might focus on specific industries, such as the automotive or pharmaceutical industries, or on specific types of investments, such as the bond market.
Once you’ve identified the sector, you can check the overall performance. This can include the impact of internal and external factors on the sector. Changes in similar industries, such as new laws, etc., are considered market forces.
Benefits of trend analysis.
In addition to being a simple investment analysis tool, trend analysis has several other advantages. Key features include:
It’s easy to compare the performance of two or more companies over the same period so you can see how strong or weak their companies are compared to other companies in the same industry.
Trend analysis can be used with many numerical types of data, including existing data (revenue or cost) and alternative data (website traffic, customer complaints, POS transactions, etc.).
According to the data, you can use these long-term trends to identify actionable patterns. You can use these patterns for future forecasting.
You can use trend analysis to investigate discrepancies in preliminary financial statements and determine whether certain adjustments should be made before publishing those financial statements.
Trend analysis allows you to examine the entire stock market for signs of potential trend changes, good or bad.