Fundamental analysis is the evaluation of non-visual information
to evaluate trading activity and make trading decisions. Whereas technical
analysts utilize charts and mathematical indicators to quantify price activity,
fundamental analysts utilize market news and market forecasts to qualify price
activity. There are numerous market events that move financial markets every
week. Some affect every market instrument while others affect specific
instruments. If the outcome of a market event has been fully discounted by the
market, traders will not notice any discernible impact on their charts. If the
outcome of a market event has not been fully discounted by the market, the
result is either price appreciation or price depreciation and traders will see
this activity on their charts.
Every week, there are fundamentally-important market events that
are scheduled in every country at specific times. Similarly, there are
fundamentally-important market events that may not be scheduled for specific
times. Some countries (Germany,
for instance) often do not schedule market events for specific times. The
outcome of market events is sometimes leaked in advance in certain countries (Germany, for
instance) for different reasons. Market events include the release of economic data, speeches and
testimony by government officials, interest rate decisions, and others.
Technical Analysis
Technical analysis differs from fundamental analysis in that
technical analysis is applied only to the price action of the market, ignoring
fundamental factors. As fundamental data can often provide only a long-term or
"delayed" forecast of market price movements, technical analysis has
become the primary tool with which to successfully trade shorter-term price
movements, and to set stop loss and profit targets. Technical analysis consists primarily of a variety of technical
studies, each of which can be interpreted to generate buy and sell decisions or
to predict market direction.
Support and Resistance Levels
One use of technical analysis, apart from technical studies, is in
deriving "support" and "resistance" levels. The concept
here is that the market will tend to trade above its support levels and trade
below its resistance levels. If a support or resistance level is broken, the
market is then expected to follow through in that direction. These levels are
determined by analyzing the chart and assessing where the market has
encountered unbroken support or resistance in the past.
Popular Technical Analysis Tools
Moving Averages (MA): Indicators used to smooth
price fluctuations and identify trends. The most basic type of moving average,
the simple moving average, is the average of the past x bars ending with the
current bar;
Moving Average Convergence Divergence (MACD): Indicator that utilizes moving averages to identify possible
trends and an oscillator to determine when a trend is overbought or oversold;
Bollinger Bands: Bands that are placed x moving
average standard deviations above and below a simple MA line;
Fibonacci Retracement Levels: Indicator
used to identify potential levels of support and resistance;
Directional Movement Index (DMI): A
positive line (+DI) measuring buying and a negative line (-DI) measuring
selling pressure;
Relative Strength Index (RSI): Momentum
oscillator that is plotted on a vertical scale from 0 to 100;
Stochastics: Momentum oscillator that measure
momentum by comparing the recent close to the absolute price range (high of the
range minus the low of the range) over a period of x bars;
Trendlines: Straight line on a chart that
connects consecutive tops or consecutive bottoms of prices and is utilized to
identify levels of support and resistance. Stay updated and have a nice day.
