Following The BIG Money:
For an aspiring trader with the goal of long-term profitability, one of the first things you should do is develop a comprehensive trading plan. A good trading plan usually contains strategies, risk management rules as well as tried-and-tested approaches that have shown a strong track record of success.
Creating such a trading plan requires a concise understanding of the financial markets. To better foster this understanding, there are three types of analyses that can help traders get a measure of the markets, sieve out the noise, and reduce the uncertainty during their decision-making process:
- Sentiment Analysis.
- Technical Analysis.
- Fundamental Analysis.
Technical Analysis: Studying the Charts
This type of market analysis involves traders analyzing the financial markets by studying the current and historical price movements on the charts and using it to predict the future price value of an asset. Looking at the chart below, you can see how price has been reacting historically along the vertical line.
These movements on a chart from the price action generally give clues about hidden levels of supply and demand as well as other patterned behavior such as which currencies are trending the strongest. Professional traders use technical analysis to create a set of clear rules and guidelines to assist in the decision-making process of when, where, and how to enter and exit a trade which is why it makes for an important facet of a good trading plan. It can be applied to virtually any trading instrument and in any timeframe and can be used to analyze anything from stocks, commodities, interest rates, or forex. You can also apply technical analysis from a short-term perspective to a longer-term time frame.
Fundamental Analysis: Trading the News
One of the most popular analyses known to traders, Fundamental analysis, involves using information from economic data reports, news headlines, and political policies to determine the intrinsic value of an asset and then trading the financial markets with this information with the aim of turning a profit. For the beginner trader, fundamental analysis is far easier to understand as the underlying idea is to buy assets with good-looking economic reports and sell assets that are doing badly with regard to the economic data.
When examining a financial instrument from a fundamental standpoint, there are several factors you should look at, depending on the asset in question. For example, stock traders might choose to look at the figures in a company’s earnings report: revenue, earnings per share (EPS), projected growth, or profit margins while Forex traders may choose to assess the figures released by central banks that allow insight into the state of a country’s economy.
Most fundamental analysis is used for evaluating share prices, but it can be used across a range of asset classes, such as bonds and forex.
Sentimental Analysis
Sentimental analysis operates on the basis of mass appeal and to a large extent, FOMO. It is used to gauge how other traders feel, whether it’s about the currency market or about a particular stock at a certain time in relation to anticipated price developments.
For example, let’s assume that an overwhelming number say 80% of traders are bullish on the FTSE 100 as they think the index is going to go higher and only remaining 20% short. This signals a strong uptrend in the market and other traders may then follow in their footsteps if they expect profits to follow.
Some traders look for market sentiment when opening a position for a financial instrument, as this can be a good indication of where the market is heading. Market sentiment can vary due to many external factors, such as economic reports, seasonal changes, national and global political events.
Conclusion
As mentioned, fundamental, technical, and sentimental analyses are different from one another. In most cases, technical analysis is used by day traders and scalpers while fundamental analysis is mostly used by long-term and swing traders. Traders often compare the differences between these analyses, however, there are no hard facts as to which style is superior. In fact, combining the three can provide a holistic trading strategy and lead to more definitive trade choices
