Detecting trading signals with technical analysis:
Let's start here by looking at technical analysis. This method consists of studying the price movements of the financial markets in order to anticipate future movements using the history of the charts of a given asset. This analysis is based on the fact that an investor can identify market trends from a purely graphical and mathematical point of view in order to use them as signals concerning future stock price trajectories. This technical analysis is one of the two main methods of market analysis with the fundamental analysis that we will explain below. Technical analysis differs from fundamental analysis in that it is based solely on the charts of an asset, whereas fundamental analysis attempts to determine the real value of an asset based on external factors and indicators.
Among the tools and instruments of technical analysis to identify signals of rising or falling prices and therefore trends in the more or less long term, we find in particular the psychological thresholds such as support and resistance levels, moving averages or Bollinger Bands. These indicators, which we will discuss in more detail in dedicated articles, all aim to help technical investors better understand charts by visually identifying trends and market strength.
The main advantage of technical analysis is that it allows the detection of price trend signals in a market, which is the basis of any investment strategy. Many people use these technical indicators to identify buy or sell signals. It is also known that technical analysis has become so popular that some consider it to be a method that has created trading rules that are self-fulfilling. Indeed, as many investors use this method to take positions, buyers and sellers are increasingly clustered around the same price levels, which ultimately leads to the expected trends.
But technical analysis is not a 100% reliable method either, because there are always external elements that influence the market. Indeed, the historical price of an asset from a charting point of view only gives a glimpse of the probable trend of an asset without any guarantee. To obtain a greater level of certainty, investors should also use several indicators and analysis tools and implement an effective risk management strategy to protect them against an unfavourable movement.
Detecting trading signals through fundamental analysis :
The other type of analysis that is essential when trying to obtain effective trading signals is fundamental analysis. This analysis aims to assess as accurately as possible the real value of a particular company or industry. In reality, fundamental analysis is not an exact science either, but the intersection of several disciplines.
Indeed, to obtain signals concerning a share on the stock market, one will carry out a fundamental analysis of the company which issues it. However, this evaluation is not limited to an analysis of the company's balance sheet or its income statement. It is indeed necessary here to add other studies like the strategic analysis which aims at determining the positioning of the company with respect to its competitors or in its sector of activity, the study of the political and economic environment or the human resources of the company.
It will thus be necessary to use and understand certain economic concepts in order to situate the company in its environment and to estimate its possibilities of growth according to its investments or strategies. Fundamental analysis is therefore not a simple financial analysis but a more general approach to all aspects likely to have an impact on the growth of a company or a stock.
Its purpose is to determine in the best possible way whether a company is overvalued or undervalued and thus detect likely signals of a rise or fall in its stock price. There are many online resources for this type of analysis, such as company balance sheets, news, strategic development plans and merger and acquisition reports.
Of course, as is also the case for technical analysis, fundamental analysis alone does not provide consistent trading signals and it is essential to perform both analyses simultaneously in order to refine an online investment strategy.