Fundamental & Technical Analysis | Black and Brahman in Wokingham

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Fundamental & Technical Analysis

This blog is designed to take you through what fundamental and technical trading analysis is. Outlining key comparisons associated with fundamental & technical analysis, including relevant strategical approaches for when formulating a trading strategy.

What is Fundamental Analysis for Trading?

Fundamental analysis is a key analytical method used to evaluate an assets intrinsic or ‘actual value’. Conducting this analysis considers the use of financial statements, industry trends and market releases to determine the asset’s value level. Things like sentimental value are not considered.

 Fundamental analysis can also be used as a tool for assessing the overall state of a market before considering entry. This is an effective tool for collecting information relevant to the macro-environment, considering economic & financial data. Fundamental analysis will in-effect infer future market trends and preparing for market change.  The fair-market value of a security should reflect the price of stock. Fundamentals to consider include:

Price Ratios.

A good way to conduct fundamental analysis is to compare the price ratios (I.e., Price to earnings, price to book value, price to sales) to similar companies, this is to help understand where the ratios for the relevant industry or sector are averaging. If a company has a lower ratio than other companies then this could indicate that the asset is undervalued, on the other hand if the ratio is higher, it could mean that the stock is overvalued.

The Company’s Financial statements.

Conducting fundamental analysis consisting of information relevant to the financial health of a business. This data is normally internally managed to analyse performance and tactics or strategy reliability. Financial data examples could be Trading venues, External  companies' books and Regulatory filings, all important for inferring the company’s current market position & financial health. This information can typically be sourced online or directly from the company being analysed.

Other examples include: the company’s Press releases by company, News releases related to the company and its business, Domestic political conditions, and Competitor analysis.

What is Technical Trading Analysis?

Technical analysis is another important analytical resource. Technical analysis primarily focuses on the statistical analysis of price and volume movement through historical data such as trading activity and chart data. This helps to find new opportunity and with navigating through the market.

In general, technical analysis looks at the following broad types of indicators:

Support and resistance

These are price levels that the stock could either stop going up or stop going down, they are generally tested and then will bounce off and head back in the direction it hit the support or resistance level from, or it will break through support or resistance level. When the stock is moving up and stops this is a resistance level, when it is moving down and stops it is known as a support level.

These levels are also usually repeated over a long-time frame, meaning if there is a support level at $10 the next time the stock falls to $10 there will likely be support at this level again.

Volume indicators

Volume indicators are used to see when a stock is oversold or overbought. This is helpful to traders because this is in effect a measure of supply and demand, if there is a lot of people selling and the buying pressure is low then the price will likely fall, if the stock is rising in price, it is a sign that the buying pressure is higher than the selling pressure. A good measure for this is comparing the volume to average volume, also the Relative strength index is a good indicator to use when evaluation of a stock is overbought or oversold.

Examples of others: Price trends, Chart patterns, Oscillators, Moving averages.

Comparison between Fundamental and Technical Analysis

Considering how both strategies operate for collecting analytics, finding a balance that best reflects the needs of a particular trading strategy does vary. However, implementing a combination of technical and fundamentals can strengthen a trading strategy as it summarises all the key forces associated with your trade or market you are operating in. Someone may focus on tracking the technical analysis of a chosen market chart, but without researching relevant information on current or upcoming events associated (e.g., a CEO leaving a company) they are exposed to potential avoidable risk.

Fundamental analysis searches for relevant economic and financial data available to assess how accurate the current value of trade is. On the contrary, technical analysis works under the assumption that the current asset value is always accurate.

Conducting fundamental analysis can be time consuming as it requires in-depth research typically looking at more than one organisation or company. Technical analysis relies less on research and more on its tools (& indicators) to help infer and manage investments. Utilising the tools at hand avoids constant speculation where possible. For example, when calculating where the market trend is moving (Fibonacci strategy) � a ‘stop loss’ support tool can be implemented around the candle sticks preventing risk of major losses.

Fundamental analysis methods tend to complement longer term trading strategies and typically is used for long-term investors. Technical analysis is more necessary for shorter-term trading strategies such as ‘scalping’ and ‘day-trading’. However, in “portfolio management trading” (mid-term) the best practise is to use fundamental and technical analysis in conjunction with each other.

Black & Brahman

At Black & Brahman we believe that fundamental analysis and technical analysis both have their place in trading. The question that arises is when should we use each method and for what purpose. On our CPD accredited courses we show you how to use fundamental analysis in order to build up your watchlist, whilst we use technical analysis to decide when to enter and exit a trade.

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ABOUT THE COMPANY

At Black & Brahman, we teach individuals how to trade; safely, reliably, and profitably.

Our comprehensive, CPD accredited courses, show you how to utilise simple, tried and tested strategies, to make your money work for you by trading stocks, cryptocurrencies, forex or commodities.

Confidence is key when trading! That’s why included in the price of the courses is your own personal mentor. On completion of the course, they will work with you whilst you initially trade with virtual money, until after you’ve started trading with live funds. You will also benefit from the knowledge they’ve gained over years of trading. For example, they will educate you on how to minimise your losses by showing you how to avoid exposing yourself to unnecessary risk, as well as teach you how to potentially take calculated risks to maximise your profit.

BLACK & BRAHMAN LTD ARE A TRADING DEVELOPMENT COMPANY. WE ARE NOT FINANCIAL ADVISERS.

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