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CM
Jeet R.Shah
Fundamental Approach
It is a method of forecasting the future price movements of a financial instrument based on economic ,social , political and other relevant factors and the statistics that will affect the basic supply and demand of whatever underlines the financial instrument. It is an answer to the question of what to buy and why to buy.
Jeet R.Shah
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Assumptions contd.
Disregarding minor fluctuations in the market, stock prices tend to move in trends which persist for an appreciable length of time. (Random walker would disagree with this statement. For any trend to persist there has to be some collective 'irrationality') Changes in trend are caused by shifts in demand and supply. These shifts no matter why they occur, can be detected sooner or later in the action of the market itself. (In the financial economist's view the market (through the price) will instantaneously reflect any shifts in the demand and supply.
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Assumptions contd.
Because of the persistence of trends and patterns,analysis of the past market data can be used to predict future price behaviour.
Jeet R.Shah
Technical Analysis
Focuses on what actually happens in the market. It looks backwards. It regards stock market behaviour as 10 % logical and 90 % psychological
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To Sum up
Neither FA nor TA should be used in isolation. It is better to use The Eclectic Approach. This meansConduct FA to establish certain value anchors. Do TA to assess the state of the market psychology . Combine FA and TA to determine which securities are worth- buying, holding and disposing off. Respect Market Price and do not show excessive zeal in beating the market Accept that for higher return there are higher risk.
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Trading Theories
Favoured by experts
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5.
Volume represents the total trading activity for a financial instrument in a particular time period.Dow considered volume to be important additional information in confirming market signals. Volume should expand in the direction of the major trend. Fig 2
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