What Is Trend Analysis? Definition, Types and Uses

By Indeed Editorial Team

Published 5 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Professionals in business, finance and economics may be interested in identifying market trends. Trend analysis is one technique that financial analysts can use to assess the performance of a business sector and make predictions about upcoming changes. Understanding this technique may help you when determining business strategies or investments. In this article, we explain what trend analysis is and what finance professionals use it for, go over the primary types of trends and why this process is important, provide answers to frequently asked questions about it and give examples of this technique being used.

What is trend analysis?

Trend analysis is a technique that compares patterns within a company by using financial statements to recognise trends in the market or forecast future performance using historical context. This analysis is based on the notion that past events can indicate future events, so financial analysts often use this technique to identify possible patterns within a specific industry and determine whether these trends may continue to occur. Once analysts choose a particular sector, they can analyse its general performance and consider how various occurrences, like new government regulations or changes in supply and demand, may impact the industry.

This kind of analysis involves collecting numerical information from records of previous performance from past trends and plotting the data on a graph to identify if there are any noticeable visual patterns. Financial professionals can use trend lines, which connect data points that allow analysts to identify upward and downward patterns in the market, based on different formulas. Trend lines can also help you predict future outcomes, such as the potential prices of a stock within a period.

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What is trend analysis used for?

Companies can analyse trends to plan more comprehensive strategies or make more informed decisions. Financial analysts can use trends to identify optimal investment choices. For example, you can analyse trends to identify whether a stock may increase or decrease in price and choose to buy or sell them. Analytical professionals can assess trends on different scales, such as for a company, industry or market. Analysing different trends can serve various purposes. For example, analysing supply and demand of raw materials can help you identify potential price trends.

Types of trends

Here are the three primary types of trends:

Uptrend

An uptrend, which financial analysts also call a bull market, indicates that the financial markets are moving upward and the prices of assets and stocks are increasing. This is typically a time of economic growth and an increase in the number of available jobs as the economy moves into a positive market and the investment cycle begins. Uptrends may occur because of political stability or recent developments in technology. Financial analysts characterise uptrends by higher peaks and troughs, which are high and low points on a graph, in a set of data over a period.

Downtrend

A downtrend, which financial analysts also call a bear market, indicates that financial markets are moving downward. During this time, the size of the economy and the value of stocks and assets may decrease. During a downtrend, companies may close or re-evaluate their business models and practices to reduce their exposure to market risks. While prices may intermittently increase and decrease, a downtrend occurs when there are lower peaks and troughs.

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Horizontal trend

A horizontal or sideways trend occurs when the prices of stock shares or assets aren't moving dramatically upward or downward and are relatively consistent. Investors may be unable to determine the direction of this trend and predict whether it's beneficial for their clients to make certain decisions. Financial professionals often consider this type of trend challenging because it's difficult to forecast short-term or long-term occurrences in the market.

Why is trend analysis important?

Analysing trends can be important for planning a company's strategies and financial actions. Here are some common reasons why this kind of analysis is important:

  • Increasing profits: Businesses can potentially increase their earnings and profits by making more informed decisions. Analysing certain trends may help a company identify growth opportunities or to avoid risks.

  • Identifying business successes: Analysing trends may also allow a company to more effectively analyse their successes to identify patterns that can expand or maintain that success.

  • Understanding market dynamics: Analysing trends also can help a business understand the dynamics in its particular market. Tracking downward and upward market mobility, businesses can familiarise themselves with specific patterns in company finances and the general economy.

  • Understanding losses: While it's important to understand business successes, it's also important to understand failures and losses. Analysing mistakes can help a company determine the root causes of failures and formulate better risk management strategies to avoid them.

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Examples of analysing trends

Here are some common examples of trends that businesses analyse:

Sales patterns

Analysts typically review sales patterns to establish why a company's products or services are selling more effectively. For example, a company may note an uptrend in sales after deploying a new marketing campaign or adding a new feature to a product. Sales trend analyses also help companies plan for the future, by understanding the strength of the company's market share and how much demand exists. Using this information, companies can apply for loans, attract investor attention and better understand their overall financial health.

Expense reports

Expense reports are another common example of trends that analysts review. These reports detail all operational or external expenses a company incurs, such as the date, cost and customer or product information for individual sales. This data can help companies identify key expenses in their operations and where they can make improvements or cut costs. For example, a company may identify an uptrend in the cost of certain materials and decide to change suppliers or find alternative materials. Accurate expense reports can help financial analysts make better predictions about a company's cash flow to mitigate operational risks.

Budget forecasting

Analysts may also analyse trends for budget forecasting, which is the practice of predicting financial results and planning a budget around those predictions. By analysing historical and current financial trends and company production, an analyst can estimate the required number of resources for a giver period. This helps companies plan by identifying their core metrics, like sales and expenses, and comparing them to historical data. This allows a company to better delegate its resources and focus on other aspects, such as entering new markets and developing new product lines.

FAQs about analysing trends

Here are some answers to FAQs about analysing trends:

What is the minimum amount of time to consider before identifying a trend?

Trends are events or information that create a pattern as they progress, so there isn't a minimum amount of time before something is a trend. You can identify a trend at any time during data analysis just by looking for similarities and patterns. For example, you may analyse a chart that shows a company's growth over time. Although the chart shows steady growth all year, you may notice a small downtrend in the same approximate period of each year.

This indicates a company has a long-term uptrend but experiences a seasonal downtrend. The goals of your analysis often dictate the period you analyse for trends. Confirming trends often requires analysing a longer period to identify as many similar occurrences as possible. Identifying the effects of specific strategic decisions may only require analysing several months' worth of data.

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How do monthly and yearly analyses differ?

Monthly and yearly analyses are different because they serve different purposes. A monthly analysis identifies smaller and short-term trends for direct action. For example, a monthly analysis may reveal an error in a company's client management software that caused a downtrend in sales during that period. Managers can use this information to create a contingency plan to mitigate the effects if a similar incident occurs again. Yearly analyses involve a much larger data set, establishing foundational trends for a company or market that may dictate a company's long-term strategies.

Do trends differ by market or business?

Trends exist in different forms and can differ across markets and companies. For example, a retailer may measure sales trends differently from a manufacturer. Companies often look for industry-specific information from the trends they study, depending on the goal of the analysis. A downtrend in one market may also be beneficial for another. For example, a drop in raw material prices is beneficial for manufacturers.

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