Introduction

As a trader or investor, how would you decide whether to buy or sell any security?

Is it based on the analysis and / or recommendation by someone else? If so, the recommendation from the third person should be based on some study. It is better that you study the methods and develop your own approach. That way, you can become an independent trader. This is possible with some effort and practice. In fact, once you learn the basics and understand the methods, you will enjoy the process of analysing and trading the markets.

Our goal at Definedge is to equip people in becoming independent traders and investors. This needs clear understanding of the concepts and ability to think about own strategies.

It is common knowledge that there is always a buyer for every seller when a transaction happens in the stock market. Both the buyer and seller think that they are right. For example, if we buy a share, we do so with the expectation that the price will appreciate. On the other hand, the seller who is selling the shares to us, does so on the belief that the price will not rise further too much.

It seems, only one party in this transaction will be right. However, both can be right. There is a possibility that there are trading for different time horizons. For example, buyer bought it for short-term and he might be right. The seller sold it from a long-term perspective and he may be proved right too.

Both the parties must be acting based on some study or analysis. May be the same study but approaching it from different perspectives. The quality of decision is based on the choice of studies and the experience. It is essential to realise that the stock market exists because of this difference in opinion between the buyer and the seller.

Broadly, there are two types of studies for market analysis: Fundamental and Technical.

Fundamental or financial analysis is about understanding the business of the company, its balance sheet and other financial report, management track record and studying the micro-and macro-economic factors. 

Technical analysis can broadly be defined as the study of the historical price action of a financial instrument. This helps in arriving at a reasonable conclusion about its prevailing demand and supply equation. This in turn will help in the buy / sell decision.

You must study at least the basics of both these branches of analysis. I will talk about technical analysis in this book.