In order to determine the value of a stock or company traders and investors used two typical models, fundamental analysis and technical analysis. It is important to note that these two types of analysis are the main forms of investing/trading in the stock market.
Fundamental analysis involves someone understanding concepts like the health of a company via its competition, revenue and profit, it's management, and potential for future growth (think Warren Buffet). The concept here is to understand a company is in a good position to grow and increase value.
Once a company increases its value it pleases investors and professional traders.
A trader or investor would have purchased the stock at a lower price and since the company has a higher value (higher priced stock) it makes a person money.
Technical analysis does not include any of the above. Technical analysis strictly involves looking at a chart with a set of indicators and recognizing patterns. One random example would be if a certain company goes up during a certain time of year.
If we assume that Apple will make more sales during the holiday season then we may be able to assume that its stock price will go up during that time of year. A professional trader that is looking at Apple stock might look for patterns in changes in price during a specific date or time of year.
Technical analysis does not involve analyzing the company's financials or management. It simply involves looking at a chart and making decisions.
An example of two reversal patterns which is part of technical analysis
Professional day traders have advantages and disadvantages with both types of analysis but it also depends on what kind of trader a person is.
If one is looking to invest in a company long-term we may look more at fundamental analysis. I prefer strictly a technical analysis approach due to the uncertain economic times we are in. I simply prefer to not have my money in the markets when something erratic or volatile can happen.
It also takes a lot of work to look at news and connect the dots with all of the different opinions and news sources online. Instead I turn on my computer and begin looking at a chart, do a few minute pre market analysis, and begin trading.
Most people that we call day traders look at the market which strictly technical analysis. They are normally classified into three different types of traders; scalpers, intraday traders, and swing traders. All three types of professional day traders are looking to do the same thing, make a profit based on a different in value. The only difference between the three is the amount of time they are involved in positions.
