There are two strategies involving the analysis of trading, the fundamental and technical analysis. Traders rely on these analytical strategies in making decisions. It is must be noted that each stock has its own trends and influencing factors, hence no specific strategy works for all.
Fundamental analysis is mostly used by traders because of the belief that various strategies should be mixed and combined in order to get the best result. Fundamental analysis takes into account all possible factors and elements that influence the market. However, the problem with this strategy is its shortfall in pinpointing the trends of stock prices. It may be able to predict upward or downward movements of prices but can not predict a close price range of the movement. Considering various factors will also create noise in the analysis process. Note that market factors are also dynamic and will not always cause the prices to move at a specific direction.
Technical analysis is used to predict future movements of prices using historical information available to traders. Traders know that prices follow a so-called trend or pattern. Normally, stock prices go down or go up at certain identified levels in the trend. Although historical trends are quite established facts, the dynamic characteristic of the market makes it foolish to think that the stock movement in the future will also behave like the past. However, past movements can be regarded as signals based on a common pattern or path in which the stock prices follow. Technical analysis may not be practical for newly issued stock due to the limited available historical information about the movement on which to base the analysis. Technical analysis allows traders to determine its entry and exit trading points in a rational way.
A specific method used in the analysis is the Elliot Wave. It defines the market movement through a five-wave formation. It suggests that the trend is composed of five waves going down -- accumulation wave, correction wave, bigger wave, correction, and then speculative wave. The speculative wave is where the public participates in the trading. It is final wave and is followed by the end of a market cycle or trend. The fault with the Elliot Wave is that it lacks credibility. The great market crash in the early 2000 proved that the market do not necessarily follow a five-wave formation.
Another method is the Gann Line and Gann angle. It geometrically correlates time and price in terms of x and y axes. W.D. Gann called it squared charts and used 1/8 point scale for stocks. This method relies on the speed of stock movement and the changes in the prices of stock. A computer software is available to post the data on the Gann Line. The Gann Line tries to measure the slope of trends and predict potential reverse movement along those trends. Since the future is very uncertain, prediction solely based on Gann Line may proved futile. Even W.D. Gann himself wasn't able to maintain his trading profits.
Somehow, trading methods must be studied well and can't be solely relied upon. At times, it may best to combine the different methods available in order to mitigate risks and maximize profit potential.
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