| Investors generally approach investing in one of two | | | | trading system. Yet many investors still rely on them |
| ways. Whether they are investing in stocks, | | | | faithfully. |
| commodities or foreign exchange; they usually base | | | | Price action interpretation involves calculating the |
| investing decisions on fundamental analysis or | | | | open, high, low and close of a security and using this |
| technical analysis. | | | | information to predict future price activity. Candlestick |
| Fundamental analysis refers to the 'hard facts' that | | | | charts are a popular visual representation of price |
| affect the underlying investment vehicle. For stocks, | | | | action. |
| the trader would be interested in the profitability and | | | | Price action can sometimes be a statistically valid |
| basic type of business in which the company is | | | | predictor of future price direction. All strategies that |
| involved, the financial data that is available about the | | | | evaluate price gaps would also fall into this category. |
| company itself and any current news that could | | | | Timing is simply restricting trading to specific times. |
| affect the company positively or negatively. The | | | | This could include strategies that attempt to take |
| fundamental analysis of commodities such as gold or | | | | advantage of the "January effect" or any strategy |
| oil or other resources would relate to calculated | | | | that limits trading based on days of the week, hours |
| supply and demand, the efficiencies of production and | | | | of the day and so on. |
| again relevant news reports that may impact future | | | | Detailed historical studies help to make timing a |
| production and consumption. | | | | popular method of technical analysis. |
| So what is the definition of technical analysis? | | | | Indicator interpretation involves analyzing price history |
| Technical analysis on the other hand, basically ignores | | | | using the many technical indicators and using them as |
| 'news' and looks at past price activity in an effort to | | | | a basis for the prediction of future price movement. |
| forecast future price movement. The presumption | | | | This category of analysis includes all methods that |
| for the technical analyst is that all of the relevant | | | | look at moving averages, volumes, standard |
| news is distilled into the actual price of the underlying | | | | deviation, and the hundreds of variants in-between. |
| security whether it is gold, a stock or a countries | | | | Popular technical indicators include MACD (moving |
| currency. | | | | average convergence divergence, Bollinger Bands, |
| Technical analysis can be broken down into four | | | | Stochastics, RSI (Relative Strength Index) and many |
| broad categories of analysis. | | | | others. |
| 1. Chart pattern interpretation. | | | | This category of analysis has become extremely |
| 2. Price action interpretation. | | | | popular for a number of reasons. Of course a primary |
| 3. Timing. | | | | reason is due to the ability of computers to quickly |
| 4. Indicator interpretation. | | | | number crunch vast amounts of historical data. There |
| Chart pattern interpretation involves looking at | | | | are also many free technical analysis sites where an |
| specific visual patterns within a price chart. Head and | | | | investor can learn how to develop their own trading |
| shoulders formation, double top, pennant, and various | | | | system. Also there is free technical analysis software |
| breakout patterns are commonly studied and used as | | | | that allows an investor to evaluate hundreds of |
| predictors of future price action. | | | | indicators quickly. |
| Because of the highly subjective interpretation of | | | | As online investing continues to expand, the field of |
| such visual patterns, they are sometimes considered | | | | technical analysis will no doubt continue to grow in |
| the least reliable for incorporating into a technical | | | | popularity for years to come. |