Along with technical analysis, fundamental analysis trading is one of the most used strategies by analysts and investors to study the financial markets as they try to predict price movements of various financial instruments which are traded in the process Each of these trades has its supporters and detractors. However, many traders combine both types of analysis to make decisions regarding the management of their operations in the market, thereby seeking to exploit the various advantages of each of them.
Technical analysis is based primarily on the study of price and patterns and their behavior to try to predict their future movements. For a technical analyst, because of everything that can influence the price, it is already discounted by it, or it has already been taken into account for that same price. Conversely, fundamental analysis trading focuses on the causes of price movements, such as news and events related to economics and politics, primarily in major economies worldwide. Therefore, the pure fundamental analyst is not concerned about graphics or price-based indicators which can occur, because of this, what matters are the underlying causes behind the different price fluctuations.
Even if many technical analysts deny it, many market rises and falls in price occur when important news related to economics or politics are known, or data from macroeconomic indicators of countries like the US, Germany and Japan are published. Whenever data on US economic indicators are announced, almost certainly the markets will exhibit high volatility.
When speaking of fundamental analysis trading, traders must also specify the market and type of financial instrument that is being analyzed. For example, in the case of stock markets, fundamental analysis not only refers to macroeconomic, political and other similar factors, but also to the study of the companies whose shares are the interests of investors. In this case the analyst examines factors such as management, business profits, income, and so on.
In this moment, because there are various economic sectors, traders can not specify a set of general rules as the general criteria for assessment and analysis, because there is no set guideline that can be applied globally to all companies or countries. For example, it is not possible to apply the same evaluation criteria used to analyze utilities, than the ones used for power generation companies, banks, real estate companies or industrial companies. For this reason a general fundamental analysis is not a concrete set of tools, but rather a series of methodologies depending on the sector to be analyzed.
In the Forex market, for example, fundamental analysis trading focuses mainly on the financial and economic theories, as well as on the developments and events of political character in order to determine the forces of supply and demand of the various currencies. It covers the review of macroeconomic indicators, stock markets and political events since the latter has to do with trust in the government, and the climate of stability of countries, which affect the market in their own ways. Among the macroeconomic indicators most commonly used by market analysts there are increased interest rates, measures of GDP, inflation, unemployment, currency liquidity, foreign exchange reserves and productivity.
Through technical analysis trading, traders try to collect all the necessary information concerning only movement of prices in the market and one of its most important principles which is basically that markets are driven by trends and there is a whole array of factors that can influence these, it is known that the mood of investors, information available to them, and other factors can manage to influence the behavior of prices are already expressed in the chart.
One of the basic principles upon which technical analysis leans itself is that everything is reflected in the price, as it assumes that all factors that can affect the market, whether social, political, economic, speculative or any other kind of factor are already reflected in the price in a direct manner. Therefore, if a trader analyzed the price of an asset or market, what they are doing is indirectly analyzing all the factors involved in that market. By many people, this statement is considered exaggerated and pretentious, but actually all it says is that the price will reflect all changes between supply and demand which is what actually originates price fluctuations.
That is, whenever demand exceeds supply, the price rises logically and conversely when supply is greater than demand the price begins to fall. Thus the technical analyst uses this knowledge and concludes that when the price of an asset rises, it is because supply has exceeded demand and if it has a low price, it is because supply exceeds demand. It is clear that the graphs do not move by themselves as they are key factors which cause the price to rise or fall through changes in the balance between supply and demand.
However the technical analyst is not interested in analyzing or understanding the fundamental factors behind these changes, since they are only limited to study what implications do these changes occur in, which in the end, are the prices. Therefore, it is stated that fundamental analysis becomes a causal analysis used to determine why certain behaviors in the market occur in the first place, while technical analysis is an analysis of consequences, that is used to make changes occur from these fundamental factors directly without studying them.
A very important part of technical analysis is based on the study of emotions and human psychology, so basically this principle is to say that humans generally tend to behave in the same way regarding circumstances that are equal or very similar. For example, technical formations that appear in the graphs are following the “bull” or “bear” sentiment that the market has at some point, which in turn tends to behave in the same way to similar circumstances. In other words, the technical analyst assumes that if certain technical training behaved a certain way in the past, will do it the same way in the future, which can be understood by the following sentence: “The best way to understand the future is by studying the past “. These guidelines are what basically define technical analysis as a investing set of indicators.
The Martingala method means that although it is easy to be wrong on a bet (on a coin toss, for example), it is very difficult to be wrong many times in a row. Just like the toss of a coin, it is similar to think of market prices going up and down (although there is a certain relationship with stock trading).
In this example a player will bet that the coin will fall on tails and he loses. It is perfectly normal. The probability of winning was 50%. However, if the player bets tails, then he loses, and keeps losing several times in a row, each time has a higher chance of resulting in a winning bet. The system that involves being wrong several times in a wrong developed into a Martingala system.
How to do the Martingale system?
A player bets 1$. If he wins, he takes it; if he loses it, he leaves his bet.
The player loses because of the 50% chance of losing.
Now the player bets 3$, double the initial bet +1$. If the player wins, he gets 3$; if he loses, he leaves it.
Now the player bets 7$, double the initial bet +1$. This is repeated until the margin is widened as comfortable as it is possible.
How does the Martingala method work?
The probability of losing 1 time is 50% (very high)
The probability of losing two times in a row is 25% (high)
The probability of losing three times in a row is 13% (important)
The probability of losing 5 times in a row is 3% (non-negligible)
The probability of losing 10 times in a row is 1% (almost negligible)
The probability of losing 20 times in a row is 0.0001% (almost impossible)
It’s a matter of waiting for the losing streak to break. And the basis is that sooner or later, it always happens at some point. The method works in theory, but in practice, it is difficult to implement.
Let’s say our player bets 1$ every 5 minutes. With this system it is possible to win 12$ per hour. This is not as much. We can assume that a player can play for 10 hours without rest, 22 working days per month, but several of your business expenses and taxes half of what you earn takes. So, the player earns about 1300$ per month. The probability of catching a bad run of 20 negative points is very low, but to be able to maintain a considerable profit margin it is necessary to bet more than one million dollars to do so.
For starters, it is not easy to have a system with an accuracy rate above 50%. And if it’s not possible to do so with the Martingala method, it is best to let it go. The reality of trading is that it is not random. This is a great advantage. If traders are good and they are able to identify good windows of opportunity with high probability of success, they can apply Martingale in very specific moments.