Fundamental and

Technical analysis
 Fundamental analysis
 A method of security valuation which involves
examining the company's financials and
operations, especially sales, earnings,
growth potential, assets, debt, management,
products, and competition. Fundamental
analysis takes into consideration only those
variables that are directly related to the
company itself, rather than the overall state of
the market or technical analysis data.
 Meaning
 Fundamental analysis is basing the valuation of an asset on
important economic reports. In forex trading, we refer to
these reports as economic indicators. Comparing the
employment reports from two countries and making a trade
based on that information would be an example of using
fundamental analysis.
 Fundamental analysis maintains that markets may misprice
a security in the short run but that the "correct" price will
eventually be reached. Profits can be made by trading the
mispriced security and then waiting for the market to
recognize its "mistake" and reprice the security
 objectives
 Fundamental analysis is performed on historical and
present data, but with the goal of making financial
forecasts. There are several possible objectives:
 to conduct a company stock valuation and predict its
probable price evolution,
 to make a projection on its business performance,
 to evaluate its management and make internal
business decisions,
 to calculate its credit risk.
Use by different portfolio
styles
 Buy and hold
 Buy and hold investors believe that latching onto good
businesses allows the investor's asset to grow with the
business. Fundamental analysis lets them find 'good'
companies, so they lower their risk and probability of wipe-
out.
 Managers may use fundamental analysis to correctly value
'good' and 'bad' companies. Even 'bad' companies' stock
goes up and down, creating opportunities for profits.
 Managers may also consider the economic cycle in
determining whether conditions are 'right' to buy
fundamentally suitable companies.
 Contrarian investors
• Contrarian investors distinguish "in
the short run, the market is a voting
machine, not a weighing machine".
Fundamental analysis allows you to
make your own decision on value, and
ignore the market.
 Value investors
 Value investors restrict their attention to
under-valued companies, believing that 'it's
hard to fall out of a ditch'. The value comes
from fundamental analysis.
 Managers may use fundamental analysis to
determine future growth rates for buying high
priced growth stocks.
 Managers may also include fundamental factors
along with technical factors into computer
models (quantitative analysis).
 Top-down and Bottom-up

a) The top-down investor starts his analysis with global

economics, including both international and national
economic indicators, such as GDP growth rates,
inflation, interest rates, exchange rates, productivity,
and energy prices. He or she narrows his search down
to regional/industry analysis of total sales, price
levels, the effects of competing products, foreign
competition, and entry or exit from the industry. Only
then does he narrow his search to the best business in
that area.

The bottom-up investor starts with specific

businesses, regardless of their industry/region.
 Procedure of analysis
 The analysis of a business' health starts with financial
statement analysis that includes ratios. It looks at
dividends paid, operating cash flow, new equity issues
and capital financing.
 The determined growth rates (of income and cash) and
risk levels (to determine the discount rate) are used in
various valuation models. The foremost is the
discounted cash flow model, which calculates the
present value of the future
 Contd….
 The determined growth rates (of income
and cash) and risk levels (to determine
the discount rate) are used in various
valuation models.
 dividends received by the investor,
along with the eventual sale price.
 earnings of the company, or
 cash flows of the company.
 Contd…
 For measurement of debt,debt equity
ratio is used
 For time value of money PE ratio is
used
 Technical analysis
 Technical Analysis:
 Study of past market action to
forecast price
 Looks for patterns in historical data
Technical Analysis Tools
 Charting
 Gann
 Cycle Theory
 Oscillators & Indicators
 Japanese Candlesticks
 Market Profile
 Computerized Trading Systems
 Support & Resistance
 Support:
 Price where buying power is sufficient to halt
downtrend
 Bears are hurting, start buying
 Resistance:
 Price where selling power is sufficient to halt
uptrend
 Bulls are hurting, start selling
 Support & Resistance Lines
 Draw horizontal lines through congestion
areas
 At upper and lower limits of trading range
Support & Resistance
Lines