Methods of Analysis

Beginner • Course 6

Investors analyse the market to determine how the value is likely to develop over a certain period. An individual or organisation may do so to determine how to trade or build a portfolio.

The Three Types of Analysis

There are three main types of analysis which involve very different approaches. These are known as technical analysis, fundamental analysis and order flow analysis. Some investors prefer to analyse the asset based on the trend and the price, while others are based on economic developments which may influence investors. Other investors monitor order flow tools to determine how the buy and sell orders may affect the price and if the data shows a pattern.

Advantages and Limitations of Analysis

Investors should also note that all methods will have certain advantages and limitations. No technique will be perfect and have a 100% success rate. However, investors use these methods to determine how the price may change. However, a positive note is that the plans do not have the same weaknesses. Therefore investors can use multiple methods to improve their understanding of the trend, price influences and price conditions. For example, traders may use technical analysis to help with the trend and fundamental analysis to understand why the trend is forming and if it is likely to continue. Lastly, order flow analysis ensures no pending orders are on the verge of entering and that there is strong buying demand.

Technical analysis mainly focuses on two categories; indicators and price action.
Fundamental analysis mainly focuses on three categories; the economy, politics and the environment.
Order flow analysis mainly focuses on orders, pending orders and volumes.

The individual or organisation needs to determine its objectives before analysing the market. Is the purpose of the investment for building a portfolio, or is the analysis to be used for “trading”? The way we analyse the market and an asset is likely to change depending on the objective of the investment.

Derivatives are complex instruments and come with a high risk of losing money due to leverage. You should consider whether you understand how derivatives work and whether you can afford to take the risk of losing your money

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