To facilitate your decisions on whether to buy or sell, when to do it and how much to invest you will need analysis; two kinds of analysis actually, Technical and Fundamental analysis.
1. Technical Analysis
Technical Analysis is the analysis of a price chart. As you may know, prices move up, down and sometimes sideways so how can you know what it will do next. Well, you don’t ..! Here can be of great help to the technical analysis.
Starting from the assumption that the price chart carries all the past information about the price, let’s see how this information can help to predict future movements of it through some simple rules:
1: The market discounts everything.
The price of every asset is a result of the difference between its demand and supply. However, other aspects play a part in the price. These are market sentiment, economic cycles, employment rate, economic data and many other factors that play a key role in the price movement. The technical analysis assumes that all these factors are already discounted at the given price and thus already reflected in the chart. This means the price movement will discount only new information.
2: Price moves in trends, so follow it!
Technical analysts expect that prices, even in random market movements, will exhibit trends regardless of the time frame being observed. In other words, a stock price is more likely to continue a past trend than move erratically. Most technical trading strategies are based on this assumption. Following the uptrend during daily trading EUR/USD makes the same sense as following the uptrend of Amazon in a long-term trade. Both are based on the assumption above
3: History tends to repeat itself
Technical analysis believes that history tends to repeat itself. The repetitive nature of price movements is often attributed to market psychology or human psychology which tends to be very predictable based on emotions like fear or excitement. Technical analysis uses chart patterns to analyze these emotions and subsequent market movements to understand trends. While many forms of technical analysis have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves.
Technical analysis attempts to forecast the price movement of virtually any tradable instrument that is generally subject to forces of supply and demand, including stocks, bonds, futures and currency pairs. Becoming a better trader might imply for you to use hundreds of patterns and signals that have been developed by researchers to support technical analysis trading. Technical analysts have also developed numerous types of trading systems to help us forecast and trade on price movements. Some indicators are focused primarily on identifying the current market trend, including support and resistance areas, while others are focused on determining the strength of a trend and the likelihood of its continuation. This will be discussed in more detail later.
Fundamental analysis is a way of looking at the market by analyzing economic, social, and political forces that may affect the supply and demand of an asset.
Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all of the factors that can affect supply and demand.
The idea behind this type of analysis is that if a country’s current or future economic outlook is good, its currency should strengthen.
The fundamental analysis is a way of analyzing the potential moves of a currency through the strength or weakness of that country’s economic outlook.
The better shape a country’s economy is, the more foreign businesses and investors will invest in that country. This results in the need to purchase that country’s currency to obtain those assets.
The same is worth for stocks or commodities. The better a company performs, the better its sales, its quarterly earnings and growth, and the more will investors want to buy its stocks. This will lead of coarse to a growing price per share so if you invested in advance you end up with a good profit.
Commodities on the other side will rely on production, climate, political disruptions and consumption. Data coming on the economic calendar help forecast the price movement making your decisions as a trader easier.
Fundamental analysis is key to your daily trading as well as your long-term investments. Whether you trade the crude oil Inventories every Wednesday, Nonfarm Pay Rolls every month, Fed data, ECB data or the earning season, Fundamental Analysis will be your best friend.
Technical analysis and Fundamentals should be used together as one, as none is the right one to be used alone. Trading can’t rely only on technical analysis without considering news and data coming in and on the other hand news and data alone are not enough without considering price resistance and support which is key to understanding possible temporary price reversals.
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