The document discusses the importance of market analysis in today's interconnected financial markets, emphasizing the need for traders to consider multiple markets and external factors. It distinguishes between two main types of analysis: fundamental analysis, which focuses on intrinsic value through qualitative and quantitative factors, and technical analysis, which examines historical price data for patterns. As financial markets become more complex, deeper analysis is necessary to understand the influences on market behavior.

1. Chapter 5:
Market Analysis
Overview
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2. In today’s globalized economy, the financial markets have become an important part of the world’s
economy. Because of the interconnectivity between the various markets, traders can no longer confine
their focus on just a single market when trading. Instead, they have to look over the whole spectrum of
financial markets to see if there are ripple effects due to extraneous factors that can affect the course
of their trades.
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3. To remove as much uncertainty as possible during their
decision making process, many financial experts have
resorted to analyzing the markets for signs or clues as to
how the markets will behave. In order to make accurate
analysis of the markets, analysts rely on a wide array of tools
at their disposal. To all new traders, the usefulness of proper
market analysis cannot be understated. In fact, over the
course of your trading experiences, you will find that the
task of conducting a market analysis will take up the bulk of
the time that you spent trading the markets.
TWO MAIN TYPES OF FINANCIAL MARKET ANALYSIS
Over the past few decades, market analysis has become a
very specialized activity. However, it is possible to split this
activity into 2 main groups based on the methods of analysis
adopted.
• Fundamental analysis
• Technical Analysis
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4. FUNDAMENTAL ANALYSIS
The first type of market analysis adopted many traders is fundamental analysis. A fundamentalist looks
at the quantitative and qualitative factors affecting a security and see if changes in these factors can
affect the supply and demand for a security and consequently affect the price of the security.
The fundamentalist’s main concern is the intrinsic value of the security. His analysis is all about trying
to measure this intrinsic value which he thinks represents the true value of the security. Hence, the
fundamentalist will study everything from macroeconomic news to companies’ annual reports as well
as company specific factors like management makeup trying to produce a value that can be compared
to the price of the security.
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5. TECHNICAL ANALYSIS
The other school of thought believes that one should analyse the markets using a method known as
technical analysis. For a technical analyst, he is not concerned about the intrinsic value of a security. To
him, the intrinsic value of the security has already been taken account into by the market and hence is
reflected in its price.
The focuses of the technical analyst instead is in the study of historical price data and see if any
discernible patterns can be gleamed from the way the prices are displayed on the charts.
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6. DIFFERENCES BETWEEN FUNDAMENTAL AND TECHNICAL ANALYSIS
The differences between the fundamentalist and technical analyst is perhaps best demonstrated by the how they
work. For example to decide whether to purchase a product or not, a fundamentalist will go to the store and study
the product in detail before deciding to buy it or not.
A technical analyst will approach the situation in a different manner. He will most probably sit outside the stores
selling the products and observe the people coming in and out of the stores. His decision will most likely be based on
the patterns that he observed. Perhaps, he might go to the store where he observed the most number of people
going in and out from since that is indicative of popularity.
FUNDAMENTALIST ANALYST TECHNICAL ANALYST
It cannot be denied that as the world’s economy becomes more intertwined, the number of factors that can affect
the markets direct and indirectly increase. With increased complexities, this will require us to dig in deeper into our
analysis in order to see what circumstances can influence the financial markets. And to do this, we need a good
foundation to build our analysis on. In the next 2 chapters, we go more in-depth into the realm of fundamental and
technical analysis.
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