Technical analysis and fundamental analysis are essential for traders in order to approach the markets. These two are at two different ends of the spectrum. Traders usually use these two analyses to research and forecast the trends of stock prices in the future.
Defining Fundamental Analysis
This analysis is useful to evaluate a specific stock’s price in order to measure the intrinsic value of that said stock. This analysis involves the whole economy and industry conditions as well as the company’s financial and management condition.
That includes evaluating the company’s earnings, expenses, assets, and liabilities.
Defining Technical Analysis
Technical analysis is different from the fundamental analysis since we only evaluate the stock’s price and volume. The main assumption for this analysis is that all fundamentals are factored into the stock’s price.
Thus, this analysis puts stock price into a special place. The technical analysts usually do not a concern on the stock intrinsic value. They prefer to use the stock chart to know the trends and patterns of the stock price in the future.
The most popular technical analysis among traders is support and resistance, trendlines, simple moving averages, and momentum-based indicators.
The Most Popular Technical Analysis
A simple moving average helps a trader to assess the stock trends by averaging the daily price of a certain stock in a period of time. If the shorter duration of a moving average crosses a longer duration, then traders get the buy and sell signals.
Support and resistance, on the other hand, assess the stock trend by its price history. Support represents the area where the buyers have stepped in before.
On the other hand, resistance represents the area where the seller has a slower advancing price. Traders usually make the purchase during the support and sell at the resistance.
Trend lines are somehow similar to support and resistance. They give a defined entry and exit points. The only difference is only in how that stock has traded in the past.
The last, technical analysis is momentum based indicators, like Bollinger Bands, Chaikin Money Flow, stochastics, and moving average convergence or divergence. Each of the indicators has a unique formula to create the buy and sell signal.
These indicators can be used in a trendless market.