Technical and fundamental analysis
Technical and fundamental analysis are the most important tools when it comes to analyzing the stocks and financial markets. Investors and the long-term traders are generally more focused on the fundamental analysis while short-term traders usually trade according to technical analysis in order to profit from short-term price moves instead of waiting to profit from long-term price movements.
Technical analysts study price movement, try to spot trends and find the best entry price according to the rules of technical analysis. Technical analysts believe that the price already includes all relevant fundamental information and they are more focused on the charts of various time frames in attempts to accurately forecast future price movements. According to technical analysis market price movements are not purely random but move in identifiable patterns and trends that repeat over time. The most common tools in the technical analysis are trend lines, moving averages, support and resistance levels, chart patterns, Fibonacci and MACD indicator. Trend lines, support and resistance levels are essential for technical traders and can be used to determine good places to buy or sell. As more and more traders look for certain chart patterns, the more likely that these patterns will manifest themselves in the markets (flags, rectangles, head and shoulders pattern, cup with the handle..)
The example of technical analysis – (General Electric Co GE, 15.12.2018)
According to the rules of technical analysis, the "bearish" trend of this stock is still very strong and for now, there is no important reason to change this negative trend. As long the price of GE is below 12 USD this stock is in the "SELL" zone. On this chart (the period from June 2017- 15.12.2018), I marked resistance and support levels. Supports levels are 7 USD and 6 USD, 10 USD, 12 USD and 14 USD represent the current resistance levels. If the price jumps above 10 USD it would be a "BUY" signal and we have the open way to 12 and then to 14 USD. Rising above 15 USD supports the continuation of the bullish trend overview efficiently for the upcoming period. On the other side, 7 and 6 USD represent very strong support levels, if the price breaks 6 USD it would be a very strong "SELL" signal and we have the open way to 5 USD.
Fundamental analysts search for stocks that are currently trading at prices that are higher or lower than their real value. Fundamental analysis usually looks at data over multiple quarters or years and the fundamental analysts try to determine a real market value of some stock, currency or commodity. Fundamental analysis is very important in stock trading because it helps us to determine the health and growth prospect of the company. This type of analysis is usually done from a macro to micro perspective in order to identify stocks that are not correctly priced by the market. Fundamental analysts study anything that can affect the stock's value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company's management.
For stocks, the fundamental analysis usually uses revenues, earnings, future growth, return on equity, profit margins, and other data to determine a company's underlying value and potential for future growth. Followers of fundamental analysis also take a look at the balance sheet and cash flow. The balance sheet represents a record of a company's assets, liabilities and equity at a particular point in time. The statement of cash flows represents a record of a business' cash inflows and outflows over a period of time. All of this data is available in a company's financial statements. It's also important to consider a company's industry: customer base, market share among firms, industry-wide growth, competition, regulation, and business cycles.
In my opinion, every trader or investor who wants to become profitable should use a combination of technical and fundamental analysis to make decisions. Fundamental analysis involves looking at the financial health of a company as well as taking into account the factors affecting its industry as a whole. Investors and the long-term traders are generally more focused on the fundamental analysis while short-term traders usually trade according to technical analysis in order to profit from short-term price moves instead of waiting to profit from long-term price movements. Fundamental analysis helps you to figure out the real market value while technical analysis helps you to find a better entry or exit position by predicting price movement.