Technical versus Fundamental Analysis

The rule followed by all investors in all markets throughout the world is that they are looking to earn money. However, if one were to closely examine the dynamics of the foreign exchange market or the stock market, they would be able to ascertain that the nature of the investments being made in these markets, the nature of the money being placed where and for what, is similar to an activity that is well known for either providing heavy losses or enormous profits, an activity called gambling.

However, businessmen that gamble for too long often find that their luck has run out, and this loss of luck ends up leaving them on the streets after they lose everything. This is due to the fact that gambling is an extremely high risk endeavor, and is at least partly based on luck. The high risk nature of this endeavor can result in profit if the luck of the gambler is good, but the balance of probability states that, eventually, in one gamble or the other, the gamblers luck will run out, and when the gamblers luck runs out, he finds that he has lost everything that he had previously earned.

Hence, the smart businessman does not gamble often, and certainly never with all that he owns. Businessmen that get rich and stay rich tend to take a more analytical approach to their investments, especially when these investments are applied in markets as volatile as the stock or foreign exchange market.

In order to minimize risk, businessmen tend to use analysis techniques so that they may gather information that would end up helping them in making investments that would be profitable. There are two main analysis techniques that are implemented by traders.

The first analysis technique is called technical analysis. Technical analysis involves the studying of past trends in order to ascertain precedents. If the market that one is trading in looks like it is following a trend previously seen in the markets, the trader can act based on this trend. If there is precedent, technical analysis usually provides a sound prediction of how the market will behave in the near future, and the use of this analysis technique can go a long way towards helping investors and traders make sound financial investments in the markets.

The second analysis technique is called fundamental analysis. Fundamental analysis involves the studying of the business’s own statements and financial dealings in order to ascertain the amount of assets, liabilities and earnings, as well as the statements and financial dealings of competitors to do the same along with an in depth analysis of the markets current status. The collection of all this information can give a trader an idea of what businesses may be making a profit in the near future, and knowledge regarding future profitability of businesses can allow the trader or investor to make a sound investment or purchase based on this new found knowledge and earn a profit.