Technical analysis

Technical analysis is the study of market action, primarily using charts, for the purpose of forecasting future trends. The term “market action” includes the three-principal sources of information available – price, volume and open interest. Technical analysis aims to forecast the price movement of any tradable asset that is subject to forces of supply and demand. Technical analysis most of the time is based on the price changes, but some analysts track other data like trading volume or open interest figures.  

Today, technical analysis is based on three main assumptions:

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1. The market discounts everything

Technical analysis is often criticized because it does not take in consideration fundamental factors. Technical analysts explain that everything from company’s financial situation to outside factors are already priced into the stock. So, according to them, there is no need to consider outside factors separately

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2. Price moves in trends

Technical analysts believe that prices move in a certain way, in short, medium and long-term trend. In other words, a stock price is more likely to repeat a past trend than move strangely.  

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3. History tends to repeat itself

Technical analysts believe that history tends to repeat itself. Technical analysis uses chart patterns to analyze these emotions and subsequent market movements to understand trends. Many forms of technical analysis have been used for more than 100 years; they are still believed to be relevant. 

In general, technical analysts look at the following broad types of indicators:

  • 1) Price trends
  • 2) Chart patterns
  • 3) Volume and momentum indicators
  • 4) Oscillators
  • 5) Moving averages
  • 6) Support and resistance levels

Fundamental Analysis

Fundamental analysis is the method of measuring the value of an asset by counting on related economic and financial factors. Fundamental analysts’ study anything that can affect the asset’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.

The final goal is to arrive at a number that an investor can compare with an asset’s current price in order to see whether the asset is undervalued or overvalued.

Quantitative and Qualitative Fundamental Analysis

When we talk about fundamentals is that it covers anything related to the economic well-being of a company. It includes numbers like revenue and profit and also include anything from a company’s market share to the quality of its management.

Fundamental factors can be grouped into 2 categories: quantitative and qualitative. The meaning they have related to fundamental factors is the same with what they mean. Let’s have a look on the definitions:

Quantitative – capable of being measured or expressed in numerical terms. 

Qualitative – related to or based on the quality or character of something, often as opposed to its size or quantity.

By this point of view, quantitative fundamentals are numbers. They are the measurable characteristics of a business. As you might have noticed the major source of quantitative data is financial statements. Revenue, profit, assets, and more can be measured with great precision.

The qualitative fundamentals include the quality of a company’s key executives, its brand-name recognition, patents, and proprietary technology.

  • Qualitative Fundamentals to Consider:
  • The business model
  • Competitive advantage
  • Management
  • Corporate Governance
  • Quantitative Fundamentals to Consider:
  • The Balance Sheet
  • The Income Statement
  • Statement of Cash Flows