AN INTRODUCTION TO FINANCE

An introduction to finance

An introduction to finance

Introduction

When day trading? a trader makes the decision about what to trade? when to trade? and how to trade? using either fundamental or technical analysis. Both forms of analysis involve looking at the available information and making a decision about the future price of the market being traded? (Taleb 2008) but the information that is used is completely different. Is it possible to use both fundamental and technical analysis together? but it is more common for a trader to choose one or the other.

It is said that “Of course the market is not efficient. I know lots of people from technical analysts to professional fundamental analysts who have made packets of money on the market”, therefore this paper discusses the above statement.

Fundamental Analysis

Fundamental traders use information about the global and national economies? and the financial state of the companies involved? as well as non financial information such as current political and weather information. Fundamental traders believe that the markets will react to events in certain ways and that they can predict future market prices based on these events. For example? if a company receives regulatory approval for a new product? a fundamental trader might expect the company's stock price to rise. Conversely? (Mandelbrot 2006) if a company has a financial scandal? a fundamental trader might expect its stock price to fall.

Fundamental traders need access to all of the available information as soon as it is available? and are therefore often institutional traders with large support teams? rather than individuals. Fundamental analysis has probably been in use since there were markets to trade? and has traditionally been done manually? (Preda 2009) but as computing power increases it has become possible for some fundamental information to be processed automatically.

Technical Analysis

Technical traders use trading information (such as previous prices and trading volume) along with mathematical indicators to make their trading decisions. This information is usually displayed on a graphical chart and is updated in real time throughout the trading day. Technical traders believe that all of the information about a market is already included in the price movement? so they do not need any other fundamental information (such as earnings reports). (Taleb 2008) There are many different types of charts and many different mathematical indicators. Some indicators are better suited to short term trading? and others are better suited for longer term trend following trading. Individual traders are usually technical traders. Technical analysis appears to have been used at least 200 years ago in Japan. Modern technical analysis is usually performed by the trader interpreting their charts? but can just as easily be automated because it is mathematical. Some traders prefer automatic analysis because it removes the emotional component from their trading? (Mandelbrot 2006) and allows them to take trades based purely on the trading signals.

Investment Style

We believe the market is not always efficient or rational. Investors are often driven by emotions? especially fear and greed? and easily succumb to their herd ...