Technical analysis is the study of trading activity through the use of patterns, trends, price movement, and volume. Fundamental analysis is the study of price movementto determine the value of an asset. Sentimental analysis is feeling the tone of the market through the study of crowd psychology.
Each of these methods of looking at an assets value has its merits and no one of them is complete on its own. Still, with some types of trading, you will want to rely more heavily on one type of analysis than another in order to better control the risk.
Analysis Tools Defined
Technical analysisdiffers from fundamental and sentimental analysis in that it only takes into account the price and volume of an asset.
The core assumption is that all known fundamentals are factored into price; thus, they become irrelevant and there is no need to pay close attention to them.
The technical trader is not attempting to measure the assets intrinsic value, but rather trying to use technical analysis tools like chart patterns, oscillatorsand trends to determine what an asset will do in the future.
Fundamental analysis relies on macro-and micro-economic factors to determine the long-term and short-term value of an asset. Fundamental analysis looks at the factors that cannot be measured in a price chart. Some of these factors include supply/demand, economic strength, and economic growth.
Sentimental analysis has often been described as “reading the news”. However, it is probably closer to “reading the price action”. This is because something reading the headlines can fool a trader. Therefore, sentimental analysis works better over the short run with technical analysis, but over the long run, fundamental analysis will likely override any short-term sentimental biases.
Trading with sentimental analysis alone can be effective, but you need to be patient when you utilize this method. News does not happen every day for every asset. If you specialize in currencies, for example, you might only be making a couple of trades per week.
