Types of Market Analysis In Financial Markets: Quick Review
There are several opinions regarding the classification of types of analysis in financial markets. Some people distinguish numerous species, and technical analysis is most often associated with its specifically graphic subspecies. I am convinced that there are only two types of analysis: technical and fundamental, and all others are their subspecies.
Technical analysis is based on the assertion that price considers everything and history tends to repeat itself. This type of analysis is limited only by the study of price charts of various financial instruments. It includes the following subspecies:
- graphical analysis - the use of various graphical tools (lines, levels, grids, etc.);
- analysis of patterns - the search on the chart of repeatable patterns or figures (patterns). Also accompanied by graphical markup;
- candlestick analysis - the search for patterns at the level of various combinations of Japanese candlesticks;
- computer or indicator analysis - the use of various indicators in the terminal that build various curves, histograms and other objects using complex mathematical algorithms. The simplest example of such an analysis tool is a moving average.
- wave analysis - most often associated with the so-called Elliott waves, as models of financial markets;
- fractal analysis - based on the idea of the market as fractal, i.e. self-similar at different scales, structure;
- option and futures analysis - the use of price data from derivatives markets in order to predict the movement of prices in the spot market;
- analysis of volumes - analysis of trading volumes according to reports of investments and obligations of traders (Commitments of Traders) from the Commodity Futures Trading Commission or other data, if there is an access to them.
This is not a complete list because every little hypothesis about the movement of price charts may have a claim to a separate type of analysis. But do not mix up the types of analysis with trading systems, since the system can include several types and even individual methods taken from one or another type. For example, there is a popular Price Action system, which is not a kind of candlestick analysis itself, but took a lot from it, especially the so-called pin bar.
The type of analysis does not dictate the conditions when and how to trade, it only expresses certain hypotheses regarding some patterns of price movement of a financial instrument, suggests methods how to identify them, designate them etc. Whereas the trading system clearly indicates what conditions it is necessary to open a deal under, and what conditions - to close.
In contrast to the technical, fundamental analysis is based on the study of various economic factors that directly or indirectly affect the movement of the price chart. The main factors of this influence: macroeconomic data published regularly on a calendar, political events, changes in other financial markets (for example, the stock market), certain events in the economic world etc.
Fundamental analysis is usually used to establish the most common trends in financial markets. Not the consequence (the movement of the price chart) is analyzed but the driving force of this movement. Proponents of fundamental analysis believe that if there are appropriate circumstances for the price to rise to certain mark, then it will certainly rise, despite any temporary fluctuations which can occur in the market.
But there is another way to use fundamental analysis, which is sometimes called news analysis or trading on the news. According to this method, traders consider not the global influence of certain factors on price movements as its instant effect. They are waiting for the moment when some important macroeconomic news comes out and try to catch the very first reaction of the market to this news. In news analysis, the so-called traders' expectations or forecasts play a crucial role. If the actual data is very different from expectations, then this usually leads to very fast impulsive changes in the price chart.
Some still believe that there is an interdependence of the location of the planets and all other processes in life, including changes in financial markets. They call this type of analysis astrological, and if you take it seriously, it would probably be correct to attribute it to a subspecies of fundamental analysis, since here it is also analyzed not a graph, but a “driving force”, which affects its movement. But so far there are no known examples of the successful application of this type of analysis, so most traders do not perceive it as a type. More facts on signal-means-profits.com