Some form of stock market research may be necessary when deciding on which shares to buy or sell. Research may also help in developing strategies as to timing, i.e. when to open and close (or invest and divest) positions.

Research can encompass many different tools of analysis which are broadly categorised into Fundamental and Technical Analysis. Traditionally investors use fundamental analysis when making investing decisions while technical analysis is the domain of traders.

Fundamental Analysis

Fundamental analysis involves the use of financial and economic data to evaluate the intrinsic value of a company. This can include the liquidity, solvency, efficiency and earnings potential. This value is then compared to the company’s current trading price with the objective of identifying undervalued or overvalued shares. A common comparative measure is the price-earnings (P/E) ratio, i.e. the valuation of a company’s share price compared to its per-share earnings.

In circumstances of undervaluation this information can be used to implement a buy-and-hold strategy in anticipation that when the true value is realised the share price will rise and the investment will appreciate.

The data used in the evaluation process can include: company information such as earning forecasts, financial statements, company announcements; information on industry or market trends; and macro-economic data including the overall economic outlook and interest rates.

Technical Analysis

The technical analyst believes that securities move in trends. And these trends continue until something happens to change the trend. With trends, patterns and levels are detectable. The technical analyst believes price patterns which have emerged in the past will be repeated in the future.

A technical analyst doesn't look at income statements, balance sheets, company policies, or anything fundamental about the company. Technical analysis looks at the actual price movement of a financial product usually represented in the form of chart. This financial product can be any number of things including a share, future or index.

While there are many methods of technical analysis often traders watch several methods at the same time, looking for reinforcement of a possible scenario such as convergence or divergence, i.e. the deviation from a benchmark or reference price, or identifiable trends where the trend will continue until something happens to change the trend.

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Technical Indicators

An indicator is a mathematical calculation that can be applied to a security's price data, volume data, or a combination of both. The result is a value that is used to anticipate future changes in price. A moving average fits our definition of an indicator.

Moving averages are examples of trend following, or "lagging," indicators. These indicators are superb when prices move in relatively long trends. They don't warn you of upcoming changes in prices, they simply tell you what prices are doing (that is rising or falling).

There is a saying amongst technical analysts that if you can get two independently derived indicators confirming the direction and strength of a trend, then you should probably trade in the direction of that trend. You should gain a basic understanding of some of the more popular technical indicators and how they can be combined to form our first trading system.

Some of the more popular trend defining indicators include:

• Moving Averages – an average of a security's price over a defined time period. The average changes. If you look at, say, a 30-day moving average, it takes into account the most recent 30 trading days. Moving averages often indicate levels of support or resistance.
• Directional Movement – measures whether a market is in a trending mode and suitable for a trending following system.
• Linear Regression – simple regression of price changes over a period of time which can help identify what might be reasonable in terms of valuation levels and project those into the future. Different time periods produce different regression results and can help identify potential price projections when the major long term trends of the market change direction.

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