In this Simple Trading Ideas trading tutorial we are going to cover the basics of market analysis. Thorough trading research  is essential for the development of effective trading systems and strategies.

Why analyze the markets? Well, when we’re trading our objective is to stack trade on top of trade on top of trade and build equity as we go. We want to make a profit on as many trades as possible and we want to have our profits be as large as possible on each trade. Sometimes there is a trade-off. If you’re trading a high-frequency trading system then you’re looking to get in and out pretty quickly. So when you’re scalping that in and of itself means that you’re taking smaller profits. When you’re trading for the long term you are, quite naturally, looking for much larger profits.

In long-term trading you are seeking to get in on trends and make a large profit per trade. Whichever type of trading that you find suitable for you, you need market analysis in order to trade profitably.

They’re basically two different types of market analysis and those are fundamental as well as technical analysis. Fundamental analysis is important as well as technical analysis and you will find that there are people that have strong preferences towards one or the other. Some will say that fundamental analysis is the only way to analyze the markets to trade and invest profitably. Others would argue the technical analysis is the only way to go. There is no right or what wrong way to trade necessarily, there are only profitable and unprofitable ways to trade.

If a trader has been trading profitably over a period of years then whatever methodology they are using is obviously working. Now you may find yourself leaning towards one or the other based upon your personality, but it’s a good idea to consider both, although here it Simple Trading Ideas we focus on technical analysis. That doesn’t mean by any stretch of the imagination that we ignore fundamental analysis…absolutely not. It doesn’t really make sense to ignore fundamental analysis even if you are a technical trader. For instance, let’s say that you’re looking at a particular stock and let’s say that this stock was in a company that produced film for 35mm cameras. Well, as we all know today 35mm film cameras have been basically completely replaced by digital cameras. In this particular case fundamental analysis of the industry could’ve definitely given us a heads up as to the direction the industry had been taking.

The whole point here, is that ignoring fundamental analysis at the time that digital photography was really starting to take off, was not really good idea if you’re looking to buy into companies producing film. Because as you well know if you try to go out and buy a film camera in many of the stores you will find that the marketplace is dominated by digital cameras. So having fundamental analysis is handy and is always smart regardless of the markets that you are trading.

A technical analyst would tell you that regardless of what the fundamentals are that the price will reflect those fundamentals over and over again. This makes perfect sense, but again don’t ignore the fundamentals. Our previous example of the stock in the company that produced 35mm film serves as a perfect example of why we should not ignore the fundamentals.

Technical analysis uses three main types of data in various combinations and they are price, time, and volume.

Price charts are used quite heavily in technical analysis. This is because price charts give us a graphical representation of the price data of a particular financial instrument. While we can certainly analyze the raw data looking at a price chart gives us perspective. With the chart we can also look for and identify patterns which have a high probability of repeating themselves over time.

As we see these patterns, we can put them to the test by seeing how they would’ve performed using the data that we have on our chart. Once we feel comfortable with this we can move on and then observe how these patterns perform on current data. This is an oversimplified overview of pattern analysis, but the basic idea of performing the necessary research before trading with actual funds is universal.

Market analysis gives you the opportunity to, “Test before you invest”. By analyzing the markets prior to trading them you can increase your probability for trading success.