When dealing with the financial markets, you need to have a way to properly scrutinize its movements. Generally, there are three types of market analysis you can use.
- Technical analysis
- Fundamental analysis
- Sentiment analysis
Get to know them one by one in this article!
Technical analysis probably makes you think of charts, graphs, indicators, and the likes. If that’s the case, you have a good idea what this is.
The charts and tools in this analysis are all serving as ways to one thing: tracking historical price patterns and timing the next price move.
Technical traders believe that whatever happened before will happen in the future, and indicators can give them a glimpse of the next chapter.
Trends and charts are helpful for these analysts, since such tools give them a visual on the market’s overall direction. The tools can also tell them something about the volume of traders in a particular market.
Of course, these technical tools aren’t always right. The analysis of charts and indicators is very subjective, in that two traders may analyze the same data differently.
This type of analysis does not heavily deal with charts and graphs. Rather, it considers the bigger picture through economic and fundamental aspects.
For instance, apart from considering the price action of a stock, the fundamental analyst also considers a company’s balance sheet, business mode, position in the market, and more.
Fundamental analysis is more often associated with long-term investing, since it primarily tries to spot an asset that’s priced lower than its intrinsic, or true, value.
In terms of forex, the fundamental trader looks at each of the currency’s economies and the macroeconomic factors affecting it.
These factors include inflation rate, gross domestic product, production growth, jobs reports, and many others.
The market doesn’t only roll on technical factors and fundamentals. It also moves according to—you guessed it right—emotions. Market sentiment is also a very crucial factor in analysis.
Sentiment can drive markets up and down or sideways. For instance, let’s say that a company’s fundamentals are largely sound and robust. However, you also see that traders are ditching it because of a totally unrelated news.
In that case, it’s possible that traders are largely bearish, meaning there’s a lot of pessimism prevailing in the market.
Or, for another example, think of a currency that, despite the overall gloom in the markets, still perks up. That currency may be a safe-haven asset, meaning it benefits in time of gloom and doom.
In that case, sentiment still drives it up. It’s not despite the gloom, but rather because of the gloom.
Most of the time, safe-haven assets are safe havens because investors and traders believe they are. Though fundamental factors still contribute, the primary driver for such assets is investors’ appetite for risks.
There isn’t really any one type of analysis that would fit all your needs as a trader. The best course of action is to combine different aspects of the analysis to come up with a much better assessment of the market’s movements.