There are about 4 major techniques of approaching the markets in order to generate alpha*:
1- Fundamental analysis:
Analyzing the fundamentals is the oldest approach and probably the only approach that will remain, as it’s the most appropriate way of analyzing assets. It seeks to find the intrinsic value of what we are trying to forecast. Some examples include equity financial analysis through balance sheet items and macroeconomic analysis to take a view on currencies.
Analyzing the charts to understand the trend and the reversal points. This is by far the most criticized type of analysis. It’s based mostly on market psychology and some mathematical concepts. Combining technical analysis and fundamental analysis is the most common fusion of approaches. Technical analysis is very common (and logical) in short-term trading.
3- Quantitative analysis:
Analyzing the returns and forecasting them through complex mathematical formulas and complex machine learning techniques. This is the hard way of approaching the markets. It’s a highly promising field that is growing day by day. One famous quantitative strategy is statistical arbitrage.
4- Sentiment analysis:
Analyzing the markets from a view that concentrates on determining the intentions of the market movers and different players. Knowing what smart money will invest is the best and least costly way of analysis and it’s what we will do in this course.
*Alpha is the excess return over a benchmark in a specified period. If you generate a 5% return while the benchmark showed a 3% return, your alpha is 2%. Of course, sometimes transaction costs can make your alpha negative. There are 3 types of investment management, active management which seeks to generate positive alpha through different strategies, passive management which believes markets are efficient and thus seek to track major indices, and a hybrid approach that combines the two. A trader should choose his or her model based on style and time horizon. You shouldn’t analyze monthly charts only to hold the position for a few days.
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