There are four main types of financial analysis that day traders need to be aware of. A good day trader absolutely must be knowledgeable about all four, but it’s likely that one particular type of analysis will resonate more with some traders than others. Market analysis is broken down into the following groups: fundamental analysis, technical analysis, behavioral analysis, and quantitative analysis.
This was the only accepted type of analysis up until the 70s and 80s. The focus on fundamental analysis is on a company’s earnings growth (P/E ratio), their book value, the industry sector forecast, peer group analysis, and the company’s dividends. Fundamental analysis is limiting because it omits any human variables that influence price movement while on the trading floor. This type of analysis depends on balance sheets, analyst opinions, and the news. Fundamental analysis is by no means exclusive to currency – it’s ingrained in other types of cryptocurrency and bitcoin trading.
The industry has always had technical analysis, but it wasn’t until computers made the data easier to collect, process, and display did it become widely accepted. Technical analysis is based upon the belief that past performance is an indicator of what’s to come. In technical analysis the price is “the truth.” The price of the security is the only factor that drives the analysis and the human element is completely disregarded.
Rising to prominence in the 90s, this analysis attempts to understand the behavior of successful traders. Markets are as rational as the humans that govern them. Since humans are governed by emotions (fear, greed, and uncertainty) behavioral analysis can help predict how the market behaves. Understanding these root emotions and the trends they create is a key advantage that Wall Street Trading gives its traders, when measured against the rest of the marketplace.
An analysis that attempts to understand behavior through advanced mathematics and statistical modeling. With derivatives, quantitative analysis applies advanced mathematics, such as stochastic calculus, to hedging positions to help mitigate risk and increase leverage.