Stock market analysis methods are generally divided into two major types: fundamental analysis and technical analysis. Each has its followers, and some traders use both approaches to achieve more accurate predictions of market movements. Technical analysis is especially popular among individual forex traders.

The purpose of fundamental analysis is to assess companies, sectors, and economic factors to determine their true value. In this type of analysis, traders closely examine industry trends, financial indicators, economic data, and competitive positions.

The foundation of this analysis lies in evaluating a particular company or sector, which includes industry trends, market share, profitability, and debt ratios. Key financial indicators, such as revenue, profitability, and financial statements (balance sheets and income statements), play a critical role.

Fundamental analysis places significant importance on macroeconomic data such as inflation, GDP, unemployment rates, and interest rates, as these have a substantial impact on the market and pricing.

Financial statements are also important, including pre-tax and post-tax earnings, balance sheets, and income statements. These figures help assess the true financial position of the company.

Analyzing competitors’ actions helps to understand a company’s position within its industry and how the actions of other companies might affect its stock price

Fundamental analysis considers transaction costs, hedging costs, and environmental factors such as the political and economic climate, which can also influence prices and risk.

In forex markets, fundamental analysis is often used to evaluate long-term trends, as currency values are influenced by complex economic factors and global events. The following macroeconomic indicators play a key role in evaluating currencies:

Analysts also keep a close eye on important economic data, events, speeches, unexpected news, and announcements, all of which can trigger significant market movements.

Technical analysis is an approach that examines market data and price movements to determine future price trends and identify investment opportunities. Although it has existed since the inception of markets, it wasn’t widely accepted as a tool for generating profits until the early 1980s. Technical analysis is generally easier to learn than fundamental analysis, which is why many traders prefer this method. It offers a broad set of tools, each relatively easy to understand and apply, but the true art lies in using them successfully in a coordinated manner. This analysis focuses on the statistical examination of past price movements of a specific financial instrument. Rather than trying to determine the intrinsic value of an asset, it aims to identify market conditions where future price movements can be predicted with high probability.

Technical analysis focuses on actual market data. By analyzing price movements and volumes, traders attempt to understand the forces driving the prices at a given moment, whether it’s more driven by buying or selling pressure.

This approach is grounded in historical price movements and volume data. Since history often repeats itself, traders use past data to understand how the market may react in similar future situations.

Chart analysis is one of the most essential tools in technical analysis. Traders typically use price, time, and volume charts to determine when to enter or exit the market.

Traders use various technical indicators, such as moving averages, RSI, and MACD, to identify market direction and the strength of price movements.

• Moving Averages:
  • Moving averages smooth out historical prices to make trends easier to recognize. The two main types are:
    • Simple Moving Average (SMA): The average of prices over a specific period.
    • Exponential Moving Average (EMA): Gives more weight to recent price movements, allowing it to respond faster to market changes.
  • Crossovers: The intersection of short-term and long-term moving averages can signal trend reversals (e.g., Golden Cross – bullish signal, Death Cross – bearish signal).
• Relative Strength Index (RSI):
  • The RSI is an oscillator that indicates whether a market is overbought (above 70) or oversold (below 30). It’s often used to predict reversal points.
• MACD (Moving Average Convergence Divergence):
  • The MACD measures the strength and direction of a trend and signals potential trend reversals. Traders monitor crossovers of the MACD line and the signal line, as well as the MACD histogram, to determine entry and exit points.

• Price Patterns:
• • Head and Shoulders: A common trend reversal pattern indicating the end of an uptrend.
  • Double Top & Double Bottom: The former signals a bearish trend, while the latter suggests a bullish reversal.
  • Triangle Patterns (Ascending, Descending, Symmetrical): Typically indicate trend continuation.
• Japanese Candlesticks:
  • Different candlestick patterns provide significant market signals. For example:
    • Doji: Indicates indecision between buyers and sellers, often appearing before a trend reversal.
    • Hammer and Hanging Man: Reversal signals indicating a potential change in price direction.

Fibonacci retracement levels help identify potential price correction levels within a trend. Traders often use the 23.6% 38.2%, 50%, and 61.8% levels to identify potential support and resistance levels.

• Volume:
• • Volume measures the number of assets traded over a specific period. It’s used to confirm the strength of trends: strong trends should develop with high volume, while weak trends have lower volume.
• Market Psychology and Round Numbers:
  • Traders often focus on “psychological levels,” such as round numbers ending with multiple zeros. These levels act as support or resistance, as market participants tend to align their decisions around these levels.

• Risk Management:
  • An integral part of technical analysis includes risk management, such as setting stop-loss and take-profit levels. Successful traders usually predetermine the maximum loss they are willing to tolerate for a position and set their stop levels accordingly.
• Strategic Approaches:
  • Swing Trading: Capitalizing on short-term price movements, typically holding positions for days or weeks.
  • Day Trading: Opening and closing positions within the same trading day to avoid overnight risk.

Technical analysis can be a powerful tool for predicting market trends and future price movements; however, it is not without risks. Successful application requires experience, understanding of market psychology, and the implementation of proper risk management techniques.