How do you evaluate a market investment?
There are two main methods:
- Fundamental analysis
- Technical analysis
The fundamental analysis consists in examining the financial statements of the company in question to determine its fair value.
The technical analysis focuses primarily on the sentiment of the market in which the company operates, i.e. on price trends, the identification of patterns and models that help to determine the prospects of that company and of the respective market.
From this analysis, it is possible to evaluate the strength or weakness of an asset and consequent trading opportunities.
What is a trend?
The market trend is the trend that a particular financial market is undertaking or has undertaken. In fact, the trend is used both for retrospective analysis and to make forecasts prior to investments.
Trends can be in different phases:
- Bullish: when a market trend is in a bullish phase, we will see on the chart a clear increase in prices.
- Bearish: when the trend of the market is in a bearish phase, we will see on the chart an obvious reduction of the prices.
- Lateral phase: when the trend is in an indefinite stall and prices remain stable, without taking a precise direction.
What is a Trendline?
Within a chart that represents the trend of any financial asset (stock, currency, etc.) a trendline is a straight line that is traced to facilitate reading and analyse this trend. It is therefore a basic element of the Technical Analysis (TA).
The technical analysis used by investors and analysts of traditional finance is equally useful to traders and investors who want to analyse the trend of cryptocurrencies.
How to Draw Trendlines
Trendlines can be upward lines or downward lines.
Start by looking at a chart that represents the trend of a price over a certain period of time.
Then, start drawing the line from the first obvious price peak, whether it is positive or negative.
Uptrend (Bullish trend)
Let’s start by identifying a downward spike early in the chart. If, after a short price drop, we see price lows at higher and higher chart positions, as in the picture above, we can trace an uptrend, by joining all the price lows with a straight line.
This is called a bullish trend, it’s aggressive and it will charge through the lows.
When a market is characterised by bullish price trends it’s called a bull market.
When, going up, you don’t see any more lows, it means that the trendline has reached a breaking point, and will probably become downward.
Downtrend (Bearish trend)
Let’s move to the high side of the chart and focus on the positive price peaks. If there are no more rising lows, then, we have to look for descending highs. Once we have found a pattern of high points at lower and lower chart positions, let’s connect them with a straight downward line.
This is called a bearish trend, it just wants to go into hibernation.
When a market is characterised by bearish price trends it’s called a bear market.
Learning to identify these lines is the first step to understanding the behaviour patterns of the market, to grasp the sentiment that is permeating a market and learn how to profit from it.