The methods used to analyse securities can be segregated into two very broad categories: fundamental analysis and technical analysis. Technical analysis is a method for forecasting the direction the price of a security is likely to take by statistically analysing the market activity of that security, such as past prices and volume. Whereas fundamental analysis attempts to identify the intrinsic value or fair value of an asset to determine which securities are undervalued or overvalued and hence should be traded.
Technical analysts make use of various tools and techniques to determine what securities to trade. They can analyse charts to find areas of support and resistance in order to determine price levels at which a trend or breakout may occur. They can also perform candlestick analysis to identify key turning points in the direction the price of a security is moving. Technical analysts also make use of various tools or indicators to determine the price at which they should buy or sell a security. These include moving averages, Fibonacci retracements, stochastic oscillators, MACD, the commodity channel index, etc.
While fundamental analysis is very useful in determining which securities to trade, relying on fundamental analysis alone is quite risky for the inexperienced traders, and you have to consider a vast number of variables. Another weakness of fundamental analyses is that it while it does determine which securities should be bought or sold, it does not specify a price at which you should take this trade. This is one of the key advantages to using technical analysis, it clearly outlines the price at which you should buy or sell a security.
While there are many benefits to apply technical analysis there are also some important weaknesses. Similar to fundamental analysis technical analysis can be open to subjective bias and one’s own interpretation. Therefore having a trading strategy is paramount to the success of any trader who practices this method of security analyses.
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