Market analysis in trading: analysis types

September 20, 2023
Last Update December 07, 2023

When it comes to trading, performing a market analysis is a must. If the analysis is not performed as it shall be, all the trades come down to mere gambling. 

Even though analysis doesn’t guarantee a profit, it reduces the risks of loss significantly and eliminates motion-based trading decisions. Moreover, it helps to earn profit even in a highly volatile market environment and a bearish market. 

Technical analysis

Technical analysis helps to forecast asset price movements based on past performance. Here is what it is about:

  • Study of market trends
  • Study of price changes over a specific time
  • Analyzing plenty of patterns and technical indicators

The premise of technical analysis is simple: history always repeats itself. The nature of technical analysis assumes that price movements and trends in the market aren’t random. That’s why it is believed that it is possible to identify patterns of repeated behavior and make forecasts based on them.

For example, let’s check the supply and demand of a specific coin. When the market is bullish, it may result in a reduced supply of the coins. Thus, demand will be growing, and it, in turn, will push the coin price upwards. When the coin price grows to a specific level, its holders will want to make a profit from the growth and will start selling the coin. At that point, it is expected that the bearish trend may start. When there are more and more people selling, supply will outweigh demand, and the coin price will start falling. From there, the cycle repeats.

This is an easy example of how technical analysis works. In reality, there are a lot of factors to consider. That’s why traders use all types of charts and technical indicators to forecast asset price movements. 

Fundamental analysis

Fundamental analysis considers more factors than technical analysis, and thus, traders get a “bigger picture.” Fundamental analysis is about exploring the intrinsic value of an asset. 

For example, you’ve found a new project that has plenty of use cases and solves a lot of problems. But the value of the coin that supports the project is very low. Based on your conclusions that the project is valuable and has perspectives to develop rapidly and consistently, you may believe that the coin is undervalued. Thus, its price may increase in the future. So, you can buy the coin and hope for a profit.

Fundamental analysis considers such details as financial statements, industry trends, the intrinsic value of the project, and influencers, among others.

On the contrary, if you see that the asset is overvalued, you can short the asset to make a profit. Shorting is speculating on a belief that the asset price is going to drop. This is a risky approach and shall be used by experienced traders only.

Combine both methods

Using technical analysis alone is a risky approach, the same as using fundamental analysis only. The best way to forecast asset price movements is to combine both methods: to analyze the past price movement trends and to study the asset value.