In the world of trading, analysis is one of the most important tools that help traders make their decisions regarding financial assets. There are two main types of analysis: fundamental analysis and technical analysis. Each type has its own approach and serves a different purpose. Below we will discuss the definition of each type, the basics of each, as well as an overview of how to read charts.
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1. Fundamental analysis
Fundamental analysis focuses on assessing the true value of assets based on economic factors and events that may affect the price. It is widely used in the stock market and cryptocurrency to evaluate the performance of assets and forecast their future.
Fundamental analysis elements:
Economic News: News related to economic indicators such as interest rates, inflation, and economic growth directly affects financial assets.
Financial performance of the company: In the case of stocks, the company's financial statements, such as profits, revenues, and expenses, are analyzed.
Supply and Demand: The level of supply and demand for financial assets, whether in traditional markets or cryptocurrencies, is a strong basis for analysis.
The purpose of fundamental analysis:
Determining the true value of an asset, and concluding whether the current price reflects this value, which helps in making long-term decisions, as traders focus on buying when they see that the asset is less than its intrinsic value.
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2. Technical analysis
Unlike fundamental analysis, technical analysis relies primarily on reading charts and analyzing price action without considering economic factors or news. It is a popular method in cryptocurrency and stock trading to make profits in the short to medium term.
Elements of technical analysis:
Charts: Charts are the basic tools that technical analysis relies on. There are several types of charts such as bar charts, line charts, and Japanese candlesticks.
Technical indicators: such as moving averages, the Relative Strength Index (RSI), and the MACD, which are used to measure price momentum and determine its trends.
Chart Patterns: Chart patterns such as head and shoulders, triangles, indicate trend reversal or continuation signals.
The purpose of technical analysis:
Predicting price movement based on historical data and exploring short-term opportunities, such as buying when the price reaches a support level or selling at a resistance level.
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How to read charts
Reading charts is a fundamental skill in technical analysis, and is an essential start to understanding market movement. Here are some basics:
1. Understanding Japanese Candlesticks:
Japanese candlesticks show important information such as the opening, closing, highest and lowest price during a given period.
If the candle is bullish (usually green or white), it means that the price has gone up. If it is bearish (red or black), it means that the price has gone down.
2. Identify trends:
An uptrend means that prices are moving upward and represents a buying opportunity.
A downtrend means that prices are heading down and represents a selling opportunity.
A sideways trend occurs when the price moves within a specific range, which means a balance between supply and demand.
3. Support and resistance levels:
Support levels are the points at which the price stops falling and starts rising; they are the prices at which traders see a buying opportunity.
Resistance levels are the points at which the price stops rising and starts falling; they are the prices at which traders see a selling opportunity.
4. Technical indicators:
RSI Indicator: Measures the strength of the trend and identifies overbought or oversold conditions.
Moving averages: Indicate a general price trend and can be used to identify entry and exit points.
MACD Indicator: Helps determine the momentum of price action and the strength of the trend.
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Conclusion
Fundamental and technical analysis are complementary in the world of trading. Fundamental analysis is used to assess the intrinsic value of financial assets, while technical analysis relies on studying charts to predict price movement. The choice between them depends on the trader’s goals and level of knowledge, and professional traders often combine them to achieve a comprehensive understanding of the market and achieve better results.