Analysing the Market

For any trader finding the right moment to invest is critical. Trading slightly too early or too late can have a significant impact on your gains, but how to ascertain the perfect moment?

Generally speaking there are two methods of analysis into which all over techniques fall. On the one hand we have fundamental analysis, and on the other we have technical analysis.

Fundamental analysis involves looking at a wide range of factors to determine whether the current price is correct or whether it’s over or under-valued. The theory runs that if an instrument is over-valued then you trade it down, if it is under-valued you trade it up. Fundamental analysis only deals with specific, known factors such as the capital reserves of a company, the assets or liabilities on its balance sheets, its market share and other similar pieces of information.

Technical analysis uses analysis of historical price actions to determine whether the instrument is likely to decrease or increase in value. This is done by various statistical analyses of where the price has been in order to determine where it will go.

So, which is better? Perhaps the most famous proponent of fundamental analysis is Warren Buffett, the most successful investor in the world and one of the richest men on the planet. His investment company, Berkshire Hathaway, only uses fundamental analysis.

This would, perhaps, suggest that fundamental analysis is superior, but that’s not necessarily the case. A general rule of thumb is that long-term investors, like Mr Buffett, use fundamental analysis, whilst short-term investors use technical analysis. After all, the share price of even the healthiest companies as determined by fundamental analysis would have fallen during a recession, but it would also recover quicker. Therefore, the shorter the term of your investment, the more you have to use technical analysis.

As far as spread betting is concerned, then, technical analysis is a good place to start. There are a wide range of technical skills which can be picked up fairly easily and can be used to inform on the market, and good spread betting companies like CMC Markets offer their traders the chance to learn and develop these skills when they open up spread betting accounts. If you can’t go on a course there’s a wealth of information available, so make sure you pick up a few skills before you start trading.