I would now like to introduce two concepts: fundamental analysis and technical analysis.

Fundamental Analysis is the search for a share’s real value, using mathematical calculations, etc based on current and past events.

Technical analysis is the study of the potential shareholders’ perceptions of the share’s real value, using the share’s price and volume movements, patterns and trends.

The differences between those who practice fundamental analysis and those who prefer using technical analysis – combined with a large dose of human folly and randomness – goes a fair way towards understanding an explaining peaks and troughs in the market.

The two types of analysis might be put differently. On one hand we have the fundamental analysts, who want to know the real value, so they can compare it to the current value and determine if it is cheap or expensive. On the other hand, we have the technical analysts who say that the real value has little bearing. What really matters is what people think the real value is.

As an example, let us suppose that you own some shares which have risen steeply in the market and they reach a point where you decide they are now over-priced and it is time to sell because you are expecting a downward correction. In order for you to sell them, someone else buys them from you. Their view is obviously different from yours… they wouldn’t buy the shares if they were expecting a downward correction. So – one of you is right, while the other wrong… and whoever is right will take money away from whoever is wrong. (At least, the potential of more money)

Sentiment also plays a part in economics like it does in the market. Interestingly, sentiment alone can severely reduce or even nullify a minor fundamental move.