There are two types of analysis people using in the financial market and they are fundamental analysis and technical analysis. In the stock market, the fundamental analysis is different than these analyses used in Forex or commodities market. On the other hand, Technical analysis is the same for all markets. Because of that I am going to start with it and explain what is it and how can it be used.
Technical analysis is a set of tools traders used that built based on historical data to predict the future movement of a security. The most important tool or indicator used in this type of analysis is the price movement which can be recognized by identified the direction of movement if it is going up, down or sideways. Technical analysis tools divided into two types which are primary indicators and secondary indicators.
The primary indicator is price movement and volume. Volume is not recognized in Forex and commodities markets since they are decentralized markets but in the stock market, you can see the volume for each day and week clearly because it is a centralized market. This is what I believe the reason that a lot of traders failed to trade Forex and commodities and have success in trading in the stock market.
When I said primary indicators that means traders cannot go against them. Traders cannot buy when the price is going down and volume increasing with this movement, as well as they cannot short or sell when the price is going up and the volume is going up too. They might think of buying when the price is going down and stop making new lower lows with fading volume as well as they might think of shorting or selling when price stop making new higher highs with decreasing volume. But the actual trade cannot happen until the definition of up/down trend is fulfilled, and that when the price starts making new higher high and new higher low for uptrend where a trader can buy, and price start make new lower low and higher low for downtrend where trade can sell.
The other indicators in technical analysis which called secondary indicators can be used to confirm the primary one, and they are moving average, MACD, RSI, Stochastic and all other indicators that used price in its formula. Traders are allowed to go against these indicators since they are following the price and once trader makes sure that she is almost got the primary indicators in her favor. These indicators mainly used to confirm the direction of the price. Some of these indicators such as MACD and stochastic can be used by smart traders to measure the momentum of the movement and identify if this up movement is just a correction wave or exact wave and also can predict if there is a new up/down trend is about to happen.
Fundamental analysis for the stocks market is different than those for Forex, but the only thing that they share in common is that a stock or Forex pair will go up when demand increase than supply and they will go down when demand is decrease than supply. Since we are not an insider in the financial institutes and banks or stock exchange, we cannot know such things about those markets unless by trying to predict the next move by using indicators that we have in our hand correctly.
For stocks market the fundamental analysis based on the financial statement of the company, cash flow, income statement and/or the earning that company made. Also, it can be sales that the company achieved which can be used as a leading indicator to predict if there will be an increase in the company’s earning or not. Asset and liabilities also are good fundamental analyses that can be used to measure the capability of a company to transform its assets to make a profit. But the only indicator that can be used as main indicators in fundamental analysis is the earning per share (EPR). This indicator is the reason why there is an increase/decrease in demand in any stock. All other financial indicators or ratios need to support this indicator because if they are not, investors and traders alike need to know there is something wrong in this company and they should escape investing in it except for short term traders who only can trade stocks even if the fundamental was bad but only for not more than three months.
Forex market fundamental analysis is different than those used in stock markets. The main indicator in the Forex market is the interest rate. Whenever it goes up the currency will go up and whenever it went down the currency will fall. The interest rate in the Forex market is just like the earning of stock in the stock market. Other indicators used in fundamental analysis in the Forex market such as the unemployment rate, inflation, and debt to GDP. Those indicators can be used as a leading indicator to predict if there will be an increase in the interest rate that will happen by the federal bank or not. The increase/decrease in interest rate can take a while to affect the related currency and it can be year or two, but in the end it still the only indicator that affects the currency market.
Fundamental analysis can be used for investment. For example, if investor sees an opportunity in a company and she is willing to wait for 10 or 15 or maybe 20 years for her investment to be fruitful, then she can just invest in that stock with neglecting the technical analysis and she does not need to bother herself with moving average or price direction because she bet in company not price as I described before. But if she is a trader especially short-term trader, then she needs to think twice before making trade about the direction of the price and how does it react with the nearest moving average as well as other confirmation indicators such as MACD or stochastic. She needs to invest her time in technical analysis and ignore the fundamental analysis. But if she trades for mid to long term, then it’s good for her to combine the two approaches. It will be better for her to understand if the stock she is about to trade belongs to a good company or not, and then she needs to see if it is a good time for her to jump in that stock or should she wait until she sees that the price is start going in uptrend and that movement is confirmed by the other many indicators.