Thursday, July 25th, 2013 by James Franklen
In the world of financial trading, whether derivatives or regular stocks, the movement in prices is analyzed and attempted to be explained in two major ways, the fundamental analysis and technical analysis. Traders around the globe use one or both of these methods to not just explain price movement, but also predict the next place where price may possibly land.
Fundamental analysts evaluate the core data behind an asset. In case of the price of stock, fundamental analysis will involve debilitating on the balance sheet of the entity, its profit and loss account and the ratios in between. To this extent fundamental analysis is number crunching exercise. However, it also involves an analysis of qualitative factors affecting the price of an asset. In case of stocks that would mean goodwill of company’s management and similar factors.
However, when you are trading options, in pairs of currencies, indices or commodities, fundamental analysis doesn’t remain the same thing. It mutates in to analysis of news and outcomes affecting the options market. Against an asset pair on option platform you do not know its balance sheet or profit and loss account. The trader has to analyze economic data, important news items, quarterly reports from various organizations, for example IMF, etc.
The weekly US economic data, such as employment figures or consumer confidence figures play immense role in moving stock indices around the globe. Similarly, Euro Zone economic data released by European Central Bank also plays its role in moving stock indices. However, it is just not the stock indices that move. Such data also correlate in anticipating future price of global commodities based on demand and supply forecast.
The other type of analysis is the technical one. This type of analysis relies on the results generated by different statistical and mathematical models to ascertain next price movement or explain the historic movement of price. Technical analysis offers compelling statistical explanations to price movements and uncovers a whole different sort of price dynamics. It is like performing an autopsy on an asset’s price.
There are various tools that are applicable in both regular options and the binary options. The foremost analytics, which we all hear about often, is, trending. You follow the trend of price and expect to make gains from it. Then there is mean reversion, a technique that assumes that eventually price of an asset settles back towards its mean. A trader can use many other technical tools, which includes momentum tracking and pattern return. With the use of various oscillators, trader determines the momentum of an asset’s price, as rising or falling. Pattern return is self-explanatory. Trader often looks for signs of market repeating its behavior in a given fashion, as it did some time earlier. This is a risky approach because prices often do not follow the same pattern with 100% loyalty.