Trend analysis is a method of predicting the future based on past data. It compares data points over time and identifies uptrends, down trends, and stagnation. If a trend is consistent over time, it suggests stability and conveys more confidence than a trend that changes drastically. However, some investors may find inconsistent trends more appealing if they analyze certain external factors that contribute to radical trend changes. Generally, high risk implies high reward opportunities.

Trend analysis is used by investors and business managers to make data-informed decisions and enhance strategies. Let’s explore what trend analysis is, its advantages, and real-world examples.

Types of trend analysis

Numerical data is the basis for trend analysis. This data is typically historical, whether it’s company-specific performance data (e.g. public financial statements) or data from the public web (e.g., competitor job postings over the past 5 years). When you add numerical data to your chart, you’ll see three different types of trends.

Upward trend

The uptrend or upward trend indicates that the data points are growing. However, this could mean different things depending on the variable you are looking at and your purpose.

Let’s say you’re a business owner and you’re looking at the cost of raw materials needed to make bread. You see that the cost is going up, which could help you to make different predictions. For example, you could predict that your business will have to increase its costs or that the final consumer will have to increase their prices.

On the other hand, if you’re an investor and you see an upward trend in the stock of company X, you may decide to buy that stock because the price is going up. An uptrend in a stock usually indicates a good condition, which helps you to decide if that stock is a good investment.

Downward trend

On the other hand, a negative trend shows that your variable is declining in value. For instance, if a company’s profit drops drastically, investors need to tread carefully because the stock is risky because the price is declining. This is also true if other economic or financial factors have a negative trend.

Trend analysis can be conducted on the asset’s historical data. If the price is declining, it shows that there is a bearish market in the asset. Therefore, investors should not invest in the asset because the prices could fall further, resulting in a loss.

Horizontal trend

Last but not least, the horizontal trend line indicates “stagnation.” Simply put, prices or any other metric aren’t rising or declining; they’re just flat.

A flat trend, on the other hand, is a trend that goes up for a single period of time, then reverses and settles down in a general direction. Horizontal trends are risky because you don’t know what’s going to happen next. If you choose to follow this trend, you’ll need to conduct an in-depth analysis of your sales regions’ revenue and costs to determine the risks associated with it.