Stock markets are a complex environment where thousands of strategies and approaches clash daily. To make informed decisions, we need access to a wide range of tools. The two main pillars of market analysis – technical and fundamental analysis – provide different but complementary perspectives on market developments.
While technical analysis focuses on price charts and pattern recognition in past data, fundamental analysis examines economic indicators, corporate results, and the influence of key institutions. Combining both approaches enables us to better understand the market environment and increases the chances of success when trading on global stock exchanges.
Technical Analysis: How to Read the Market’s Story from Charts
1. Trend Typology – The Cornerstone
One of the first concepts a beginner trader encounters is the concept of a trend. A trend represents the general direction in which the price of a given asset (stock, commodity, index, ...) is moving. We distinguish 3 basic types of trends:
- Uptrend: A sequence of higher highs and higher local lows indicates that buyers are in control of the market
- Downtrend: A sequence of lower highs and lower local lows indicates a dominance of sellers in the market
- Sideways: The price moves in a relatively narrow range and does not form a clear trend, making trading more difficult
Identifying the trend is key to determining the trading direction – in an uptrend, investors often focus on buying, while in a downtrend they focus on selling or so-called shortselling.
2. Supports and Resistances: Where Will the Price Stop?
Support is a price level at which the market previously found enough buyers to stop or reverse a downward trend. Resistance, on the other hand, represents a level where enough sellers previously appeared to slow or halt an upward movement. These levels often play a psychological role – traders focus on them when setting entries and exits from positions.
- Supports: Often form at previous local lows; when the price drops to this level, traders may expect buyer interest
- Resistances: Appear at previous highs; as price approaches resistance, the likelihood of profit-taking and weakening buying pressure increases
3. Chart Patterns: Visualization of Market Psychology
Chart patterns are price development shapes that historically tend to repeat and indicate certain likely future scenarios. Basic patterns include:
- Reversal patterns: For example, Head and Shoulders, Double Top, or Double Bottom; these patterns signal a possible change in the current trend
- Continuation patterns: Triangles, flags, and pennants suggest that the market will continue the previous trend after a short consolidation
Knowledge of patterns helps traders better time their entries and exits and estimate the likely price development.
Fundamental Analysis: Macroeconomics, Companies, and Central Banks
While technical analysis focuses on the history of prices and volumes, fundamental analysis seeks the reasons behind price movements. It examines the “essence” of the asset – its economic, financial, and political background.
1. Macroeconomic Data: The State and Development of the Economy
The most important macroeconomic indicators include:
- GDP (gross domestic product): The total value of goods and services produced in a country; its growth typically supports currency and stock market strength
- Inflation: Rising price levels affect interest rates and the monetary policy of central banks
- Unemployment: Lower unemployment usually supports consumption and economic growth, which can positively influence currency rates and stock prices
- Production indices (e.g., PMI): Indicate the condition of industry, services, and overall business activity
Monitoring these figures helps estimate the overall economic health and predict market reactions to new information.
2. Corporate Results: Company Health Under the Microscope
For stock investors, quarterly and annual corporate reports are key. Important indicators include:
- Revenue, profit, and margins: Increasing revenues and profits indicate solid company performance, which can lead to stock price growth
- Metrics such as P/E, P/B, or EV/EBITDA: Help assess whether a stock is overvalued or undervalued
- Outlook and strategy: A company presenting a strong vision and innovation may gain investor trust
3. Central Banks and Their Policy
Central banks, such as the Fed or ECB, have a crucial influence on currency rates, interest rates, and thus the price of many assets.
- Interest rate changes: Rate increases usually strengthen the currency and may negatively affect stocks or commodities sensitive to financing
- Monetary policy: Long-term programs supporting liquidity in the economy can trigger price increases in stocks, bonds, and commodities
How to Combine Technical and Fundamental Analysis?
Better market understanding lies in the ability of a trader or investor to combine technical and fundamental approaches:
Summary of Market Analysis
The connection of both analyses is like viewing the market from a bird’s-eye view and a detailed macro simultaneously. While fundamentals explain the “why” of market movements, technicals show “when” and “where” to enter or exit. Traders who master both approaches and learn to integrate them gain a more comprehensive picture of market dynamics. This not only increases their chances of profit but also improves their understanding of what is really happening in the markets.
Understanding the principles of market analysis is another step toward success in financial markets. In Part 4 of our Guide for Stock Market Beginners, you can look forward to the topic Emotions in Trading and Success. And if you don't want to wait or learn more, there's always XDIGR, where you simply choose a slot (a prepared stock trade) and send your deposit to it. As always, our experienced traders will take care of everything else.
