Understanding of stock market and research methods before trading or investing can be divided into two broader spectrums. These two approaches are totally different and often conflicting, but in the long run, both of them yield results. They are called fundamental analysis and technical analysis respectively.
Fundamental analysis is the study of a company’s inner health; it is concerned with all the available financial data of a given company, which includes company results, present and future work orders, past work experience of that kind of works, cash reserve of the company, loans and other liabilities of the company and so on. In short, it deals with SWOT of a company, where SWOT stands for strength, weakness, opportunity and threat. And after considering all these, a fundamental analyst would determine if a company is currently over valued or undervalued, if its is undervalued then a buy will be recommended and if it is over valued then a sell will be suggested.
Technical analysis, on the other hand, solely dependent on the price of a company’s share, it asserts that everything is priced by the market which is priced as per the supply and demand of the given commodity. So in case the supply increases for a given commodity (here stock) then the price will go down, on the other hand, if the demand increases suddenly then price of the stock will also increase. So for a technical analyst, price is supreme.
According to established technical analysis theories, market is place where the market participants show the mass behaviours. Here the theory of supply and demand produces two stronger emotions among the traders. These are fear and greed. Perhaps most strongest emotions of the human, which ultimately drive the traders.
Since no matter what is the cause, but a group of peoples will react in same manner during the case of greed or in a fearful situation, so no matter what is the cause, the traders of yesterday, today or tomorrow will react in the same fashion whenever such a situation arises. So as per technical analysis, history always repeats, thus in technical analysis, the importance of historical price action is supreme.
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