A market analysis is a quantitative and qualitative assessment of a market. It looks into the size of the market both in volume and in value, the various customer segments and buying patterns, the competition, and the economic environment in terms of barriers to entry and regulation.
Technical analysis is the framework in which traders study price movement. The theory is that a person can look at historical price movements and determine the current trading conditions and potential price movement. The main evidence for using technical analysis is that, theoretically, all current market information is reflected in the price. If the price reflects all the information that is out there, then price action is all one would really need to make a trade. Now, have you ever heard the old adage, “History tends to repeat itself“? Well, that’s basically what technical analysis is all about! If a price level held as a key support or resistance in the past, traders will keep an eye out for it and base their trades around that historical price level.
Technical analysts look for similar patterns that have formed in the past, and will form trade ideas believing that price will act the same way that it did before. In the world of trading, when someone says technical analysis, the first thing that comes to mind is a chart. Technical analysts use charts because they are the easiest way to visualize historical data! You can look at past data to help you spot trends and patterns which could help you find some great trading opportunities. What’s more is that with all the traders who rely on technical analysis out there, these price patterns and indicator signals tend to become self-fulfilling. As more and more traders look for certain price levels and chart patterns, the more likely that these patterns will manifest themselves in the markets. You should know though that technical analysis is VERY subjective. Just because Ralph and Joseph are looking at the exact same currency or stock chart setup or indicators doesn’t mean that they will come up with the same idea of where price may be headed.
Fundamental analysis is a way of looking at the market by analyzing, economic, social, and political forces that may affect the supply and demand of an asset. the markets you think about it, this makes a whole lot of sense! it is supply and demand that determines the price. Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all of the factors that affect supply and demand. You have to understand the reasons of why the increase in sales number, in every quarter or decrease in employment rate affects a stock or country’s economy. The idea behind this type of analysis is that if a company current or future economic outlook is good, their stock price should strengthen. The better shape a company is, the more foreign businesses and investors will invest in that company. This results in the need to purchase that company stock to obtain those assets. In a nutshell, this is what fundamental analysis is:
In order to get their hands on these lovely assets, traders and investors have to buy some greenbacks first. As a result, the value of the stock will likely increase.
Later on in the course, you will learn which economic data points tends to drive stock prices, and why they do so.
This is why sentiment analysis is important. Each trader has his or her own opinion of why the market is acting the way it does and whether to trade in the same direction of the market or against it. Kidding aside, the market basically represents what all traders – you, Warren Buffet or Celine from the donut shop – feel about the market. Each trader’s thoughts and opinions, which are expressed through whatever position they take, helps form the overall sentiment of the market regardless of what information is out there. The problem is that as retail traders, no matter how strongly you feel about a certain trade, you can’t move the markets in your favor. Even if you truly believe that the stock price is going to go up, but everyone else is bearish on it, there’s nothing much you can do about it (unless you’re one of the RJ – Rakesh Jhunjhunwala or GS– Goldman Sachs!). As a trader, you have to take all this into consideration. You need to perform sentiment analysis. It’s up to you to gauge how the market is feeling, whether it is bullish or bearish. Then you have to decide how you want to incorporate your perception of market sentiment into your trading strategy. If you choose to simply ignore market sentiment, that’s your choice. But hey, we’re telling you now, it’s your loss! Being able to gauge market sentiment aka sentiment analysis can be an important tool in your toolbox.