Stay updated with the most recent market analysis, which can guide you on the road to successful trading. Both fundamental analysis and technical analysis have proven crucial for trading as they help grasp a deeper understanding of the market, and assist in making educated decision whilst trading.
By definition, technical analysis is the forecasting of the future price action of an underlying financial asset based on its past price behaviour. Essentially, technical analysts believe that ‘history repeats itself’ and thus, a price chart is a technical analyst’s best friend. Some of the methods used by technical analysts include tracking chart patterns, such as head and shoulder pattern, and utilising mathematical indicators, such as moving averages and Stochastics.
By definition, fundamental analysis is the study of economic, social and political factors that affect the supply and demand of an underlying financial asset. Basically, while technical analysts seek to find out ‘when’ an asset’s price will move, fundamental analysts attempt to establish ‘why’ an asset’s price will move. A major method which fundamental analysts apply in the market is tracking the Economic Calendar for major economic events and news releases that may have an impact on the prices of their favourite assets.
The prevailing price action of any particular underlying financial asset reflects the overall opinion of all market participants. The combined ‘feel’ or ‘mood’ of the market is what is referred to as market sentiment. Essentially, sentiment signifies the combined attitude of market participants towards risk. When the sentiment is bullish, the price of the underlying asset will tend to go up; whereas a bearish sentiment will drive prices lower. A major sentimental analysis tool in financial markets is the COT (Commitment of Traders) report released every week by the U.S. CFTC (Commodity Futures Trading Commission). AvaTrade also displays its own summary of overall long and short positions of major assets on its WebTrader platform.
Market Analysis FAQ
- What is the purpose of market analysis?
The two types of market analysis – fundamental and technical – provides important information about the price of an asset, and the condition of the sector or industry it is in. Fundamental market analysis focuses on economic data. That can be either macro data, such as GDP and employment reports, or microdata that is specific to one company such as the P/E or P/S ratios. Technical market analysis looks at the historical price action of an asset, seeking to identify patterns that can be used to locate potentially good entry and exits points for trades. So, at the end of the day the purpose of market analysis is to locate good trading opportunities.
- What is fundamental market analysis used for?
Fundamental analysis seeks to measure the intrinsic value of some asset, usually a stock, by examining its related financial or economic factors. The end goal is to arrive at some number, or series of numbers, which an investor can then compare with the current price of the asset to determine if it is overvalued, undervalued, or fairly valued. This information is then used to make decisions on whether to buy or sell an asset. Fundamental analysis is one of two ways that investors use to values assets, the other being technical analysis.
- What is technical market analysis used for?
Technical market analysis uses data such as the price data and trading volumes of assets to determine if they are currently overbought, oversold, or fairly valued. With technical analysis an investors tries to determine how the supply and demand of an asset affects its price, trading volumes, and liquidity. Where fundamental analysis is typically used to evaluate the long-term potential of an asset, and is most useful for investors, technical analysis can be used to generate short term trading signals that are more suitable for active traders.