Everyday when you watch TV for Financial news you specially hear couple of terms very frequently aka Fundamental and Technical analysis and today I would try to explain them in very newbie’s terminology here for every one to refer to.
Before I start some short definitions.
Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action which take into account price of instruments, volume of trading and, where applicable, open interest in the instruments.
Fundamental analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply demand chain of whatever underlies the financial instrument.
If you are looking for more definitions related to markets refer stock market terms
Main differences between the two types of analysis:
|Fundamental analysis||Technical analysis|
|Focuses on what ought to happen in a market||Focuses on what actually happens in a market|
|Factors involved in price analysis:
||Charts are based on market action involving:
A technical analysis is based on three axioms:
- Movement of the market
- Movement of price or sector.
- History does repeats itself
Bull / Bear Trends
A bull trend is identified by a series of rallies where each rally exceeds the highest point of the previous rally. The decline, between rallies, ends above the lowest point of the previous decline. In short it forms higher highs and higher lows
The start of an up trend is signaled when price makes a higher low (trough), followed by a rally above the previous high (peak):
Start of Bull Phase = higher Low + break above previous High.
The end is signaled by a lower high (peak), followed by a decline below the previous low (trough):
End of Bull Phase = lower High + break below previous Low.
A bear trend starts at the end of a bull trend: when a rally ends with a lower peak and then retreats below the previous low. The end of a bear trend is identical to the start of a bull trend.
In short the Technical Analysis can be summed up as
- A bull trend starts when price rallies above the previous high
- A bull trend ends when price declines below the previous low
- A bear trend starts at the end of a bull trend (and vice versa).
No industry or company can exist in isolation and so there are external factors which determine to an extent growth of a company and so fundamental analysis is a method of forecasting the future price movements based on economic, political, environmental and other factors and statistics that effects the basic supply demand chain.
Some of the factors which can effect Analysis are.
- External factors
- Political condition
- Foreign Exchange
- Government Policies in general
- Government Policies pertaining to the sector
- Interest Rates
- Internal Factors
- The Management
- How a company is perceived by its competitors?
- Is market leader in its products or in its segment
- Company Policies
- Employee / Labour Relations
- Where the company is located and where its factories are?
- Financial Statements like Cash Flow / Balance sheets