Technical and fundamental analysis in investment is essential because they seek to give the investor an edge to beat market developments.
It is important to have a thorough understanding of both models as their application can make the difference between success and failure in investments. Here are some key points to consider.
What is technical analysis in investment?
Technical analysis in investment is the name given to all the tools and actions that can be carried out to obtain information. That allows us to try to predict the behavior of the markets.
This type of analysis aims to obtain the largest possible volume of data on any trend or movement that an asset, index, market, etc., may have by taking references from its historical quotations.
It is a tool that can be applied to any market, such as the foreign exchange market, the stock market, indices, etc.
What is technical market analysis for?
Technical analysis is used when assessing investment decisions. Generally, it identifies signals about trends in the financial assets you want to trade.
That can have different uses, such as identifying trends running out of steam, those that are activating, or that remain neutral. All of this allows you to gain an edge over the market to trade in favor of it by predicting its behavior.
How is a technical analysis done?
There are many ways to apply technical analysis to investments. The most basic ones are based on three elements that can combine:
Trend lines: these are lines that are drawn on asset charts. They usually look for two points of connection between the movements on the chart. For example, an upward trend will look for one or two consecutive lows, and a downward trend will look for two peaks.
Moving averages are lines that try to predict whether trends are valid before trading. Different measures can be combined, although using two with movements above and below 20 and 40 days is common.
Oscillators: these are another element used in basic technical analysis. It is used to identify overbought or oversold moments to know if the market has risen or fallen excessively, waiting for a change in the trend.
What is used in technical analysis?
Although different concepts and tools are usually taken into account, the most common ones in technical analysis are:
- The use of charts
- Taking advantage of closing prices
- Analyzing patterns and trends
- Determining supports (price floors) and resistances (price ceilings).
- Divergences that indicate imbalances between an asset price and a market indicator.
What is fundamental stock market analysis?
Among the tools used to take advantage of the market when investing, fundamental analysis is one of the two main methods (along with technical analysis).
Although there are different ways of understanding fundamental analysis, when it comes to determining the value of an asset, three main elements are used:
- The relationship between price and earnings
- Earnings per share
- Revenue growth
- Types of fundamental analysis
Although it can be categorized in different ways, there are two clear models of fundamental analysis:
When it is analyzed top-down: it starts by analyzing the market situation of a sector until it reaches a specific stock.
When it is analyzed bottom-up, the starting point is the analysis of the price of an asset and then moves upwards by studying it in its sector and the market.
What is fundamental analysis for?
It is considered a basic part of the analytical tools before trading, primarily in the equity market, although it can also apply in other markets.
What fundamental analysis aims to achieve is an assessment of the intrinsic value of stocks and the conditions that may influence that value. It is, therefore, a comprehensive analysis that can include everything from movements unique to the company issuing the asset to geopolitical, social, etc., situations.
Combined with technical analysis, it generates the possibility of obtaining a better volume of information on market trends and share prices.
How to do fundamental stock market analysis
There is no single way to perform a fundamental stock market analysis. While many tools attempt to simplify the actual research, it is common for investors to generate their interpretation strategies.
Some factors that are taken into account when valuing a fundamental analysis in the stock market may be:
- The state of the asset, its intrinsic price performance, and aspects related to the issuing company.
- The sector’s situation in which the company is issuing the asset as well as the market it belongs to.
- Macroeconomic, political, or social aspects that may influence the value of a share.
For example, if you analyze only a stock market share, the starting point may be a company’s earnings report over a given period.
However, if you do a fundamental analysis on Forex, other data such as geopolitical movements and central bank reports will be important.