| Making investment decisions relies on utilizing two | | | | Thirdly, history tends to repeat itself, mainly through |
| main methods of analyzing stock picks. These two | | | | price movement. The repetitive nature of price |
| methods are fundamental analysis and technical | | | | movements is as a result of market psychology, |
| analysis. The two are very important when analyzing | | | | because investors in the stock market today |
| stocks, but are very different in their approaches. | | | | consistently react to similar situations over a period |
| Fundamental analysis looks at the company in detail | | | | of time. Technical analysis uses charts that |
| from the management to the industry sector. | | | | sometimes are hundreds of years old because it is |
| Technical analysis has no interest in the value of the | | | | believed that the historical data will show repetitive |
| company and only focuses on the price movement in | | | | patterns in price movement. Many traders will use |
| the stock market. It looks at the supply and demand | | | | technical analysis not just for stock picking or trading |
| in a market to determine direction or trends in the | | | | stocks, but also for futures, commodities, or |
| future. | | | | currencies. This is because technical analysis can be |
| Technical analysts will look at data, mainly on past | | | | used on any securities with past trading data. |
| volumes and prices; they use stock charts and other | | | | Trends are an important factor in technical analysis, |
| tools to identify patterns that could indicate future | | | | and there are three types of trends; upward trends, |
| performance. Technical analysis is based on three | | | | downward trends, and sideways or flat trends. When |
| assumptions, the first being market action discounts | | | | you observe a chart and see a series of peaks and |
| everything. This means that at any given time, | | | | troughs with each successive one higher than the |
| anything that can or could affect a company will be | | | | other, this indicates an upward trend. Conversely, if |
| reflected in the stock price, including fundamental | | | | you see the peaks and troughs successively lower |
| factors. This means that technical analysts see no | | | | than the previous, it indicates a downward trend. |
| reason to consider these factors separately. | | | | Little or no movement up or down would be a |
| Secondly, price moves in trends, meaning that after a | | | | sideways trend. Trend patterns on a chart are |
| trend is in effect, the future price movement will be | | | | important as it allows you to identify support and |
| in the same direction as the trend and not go against | | | | resistance points. These are areas where trends |
| it. A technical analyst may give you stock tips based | | | | cannot move higher or lower and are normally |
| off this fact. | | | | followed by a reversal. |