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Fundamental and

 Technical analysis

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Fundamental analysis

 A method of security valuation which involvesexamining the company's financials and

operations, especially sales, earnings, growth

potential, assets, debt, management, products,and competition. Fundamental analysis takesinto consideration only those variables that are

directly related to the company itself, rather thanthe overall state of the market or technicalanalysis data. 

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Meaning

Fundamental analysis is basing the valuation of an asseton important economic reports. In forex trading, werefer to these reports as economic indicators.Comparing the employment reports from two countriesand making a trade based on that information would bean example of using fundamental analysis.

Fundamental analysis maintains that markets may misprice a security in the short run but that the"correct" price will eventually be reached. Profits can bemade by trading the mispriced security and then waiting for the market to recognize its "mistake" and repricethe security 

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objectives

Fundamental analysis is performed on historical andpresent data, but with the goal of making financialforecasts. There are several possible objectives:

to conduct a company stock valuation and predict itsprobable price evolution,

to make a projection on its business performance,

to evaluate its management and make internal businessdecisions,

to calculate its credit risk.

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Use by different portfolio styles

Buy and hold 

Buy and hold investors believe that latching onto goodbusinesses allows the investor's asset to grow with the

business. Fundamental analysis lets them find 'good'companies, so they lower their risk and probability of  wipe-out.

Managers may use fundamental analysis to correctly 

 value 'good' and 'bad' companies. Even 'bad'companies' stock goes up and down, creating opportunities for profits.

Managers may also consider the economic cycle in

determining whether conditions are 'right' to buy fundamentall suitable com anies.

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Contrarian investors 

Contrarian investors distinguish "in the shortrun, the market is a voting machine, not a weighing machine". Fundamental analysis allowsyou to make your own decision on value, andignore the market.

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 Value investors 

 Value investors restrict their attention to under-valuedcompanies, believing that 'it's hard to fall out of a ditch'.

 The value comes from fundamental analysis. Managers may use fundamental analysis to determine

future growth rates for buying high priced growthstocks.

Managers may also include fundamental factors along  with technical factors into computer models(quantitative analysis).

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 Top-down and Bottom-up

a)  The top-down investor starts his analysis with globaleconomics, including both international and nationaleconomic indicators, such as GDP growth rates,inflation, interest rates, exchange rates, productivity,and energy prices. He or she narrows his search downto regional/industry analysis of total sales, price levels,the effects of competing products, foreigncompetition, and entry or exit from the industry. Only 

then does he narrow his search to the best business inthat area.

 The bottom-up investor starts with specificbusinesses, regardless of their industry/region.

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Procedure of analysis

 The analysis of a business' health starts withfinancial statement analysis that includes ratios.It looks at dividends paid, operating cash flow,

new equity issues and capital financing. The determined growth rates (of income and

cash) and risk levels (to determine the discountrate) are used in various valuation models. Theforemost is the discounted cash flow model, which calculates the present value of the future

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Contd…. 

 The determined growth rates (of income andcash) and risk levels (to determine the discountrate) are used in various valuation models.

dividends received by the investor, along withthe eventual sale price.

earnings of the company, or

cash flows of the company.

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Contd… 

For measurement of debt,debt equity ratio isused

For time value of money PE ratio is used

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 Technical analysis

 Technical Analysis:

Study of past market action to forecast price

Looks for patterns in historical data

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 Technical Analysis Tools

Charting 

Gann

Cycle Theory  Oscillators & Indicators

Japanese Candlesticks

Market Profile Computerized Trading Systems

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Support & Resistance

Support: Price where buying power is sufficient to halt

downtrend Bears are hurting, start buying  Resistance: Price where selling power is sufficient to halt uptrend Bulls are hurting, start selling 

Support & Resistance Lines Draw horizontal lines through congestion areas At upper and lower limits of trading range

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Support & Resistance Lines

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