The financial market is classically defined as a system of relations that ensures the movement of funds between various economic entities. Therefore, it is crucial to understand how you see the market and to anticipate how others might view it.
If you are growing wheat, mining gold, or extracting oil, you need a consistent outlet for your product to maintain the production process. You can adjust it to some extent, but you are unlikely to meet sudden changes in demand. In this case, your foundation is fundamental analysis. Essentially, it doesn’t matter much at what price your product will sell; what matters is the delta between your costs and the profit you receive from selling your product. Any change in one price affects the entire supply and demand chain. You will need to thoroughly study this economic cycle to understand how and when you can influence it.
The next category of fundamental analysis users are those seeking a fixed return on investment. This group is primarily interested in debt obligations, rental income, or dividends. Therefore, your asset should not be subject to significant market fluctuations and should be economically reliable. Again, fundamental analysis will come to your aid. In this case, you are unlikely to influence the economic cycle directly, but tracking key stability factors of your assets will help you dispose of them timely.
Now, we reach the category that aims to profit from the market by the price difference between buying and selling. Your main focus here is price movement. In this scenario, I wouldn’t rely much on fundamental analysis if you cannot influence the production or consumption process of the asset in question. You will have to depend on assumptions about other people’s actions, which is inherently unreliable.
In our arsenal, we will have technical analysis, financial analysis, and something I would call actions based on the efficient market hypothesis or one of the many types of price action. Let’s go through them in order.
Technical analysis is based on the existence of patterns in the market, and due to these patterns, history repeats itself. The market is cyclical and periodic. This is the most popular type of analysis, constantly being updated with new stars conquering financial heights and ready to share their knowledge.
Financial analysis aims to find the true price range of an asset by building a mathematical model and using a probabilistic approach. The idea is that the price will be within a certain range with a certain probability. In the model-building process, periodicity, cyclicity, and seasonality—factors on which technical analysis relies—are excluded from the price, yielding a “clean price” without external influences. However, the decision on how an object affects the asset is made by a person based on their logic, and the market does not always follow this logic. Financial analysis is more labor-intensive than technical analysis and requires a high level of knowledge in mathematical disciplines like differential equations, mathematical statistics, and probability theory. It is widely used by financial institutions with enough resources to test several, possibly mutually exclusive, models simultaneously, considering the necessary staff of specialists.
Finally, we have price action—a system based on the absence of indicators and calculations focused solely on planning profit. Often these actions may seem completely illogical. The theoretical foundation for such trading was laid by Eugene Fama’s efficient market hypothesis, formulated in 1965. Fama won the Nobel Prize for this work almost half a century later, in 2013. This hypothesis is very close to the Dow Theory. In my opinion, Dow Theory represents the first, most basic stage of market efficiency. The highest stage implies the absence of any insider information, equality of all market participants, and the formation of a fair price without any transformations or additional conditions. These conditions seem somewhat idealistic, but the existence of financial instruments like options for almost 60 years suggests that this hypothesis holds some truth. The basis for successful option trading is the seller’s ability to adapt to market movements within a limited time frame with minimal losses. This is the longest path to mastering trading, taking 10 years or more. Its secret lies in the ability to plan profit based on constantly changing market volatility.
To summarize, your market perception determines your role in the market. The easiest path in the market is as a producer of a market product, but there is a catch: you need to grow to the level of a producer. As a financial analyst, the second path requires serious mathematical education followed by a narrow specialization in the economic field. This is the most reliable and shortest path. Finally, a trader-speculator’s path invariably starts with technical analysis and follows an unpredictable trajectory. The choice, as always, is ours.
Best regards.
