Stock Technical Analysis Or Fundamental Analysis – Does Charting Make More Than Dull Valuation?
There’s a wealth of information out there for you to wade through, some people say you should do it one way and others say something else is better. One of them must be wrong surely. Well in numerical terms just through sheer chance one is likely to work better but often a lot of what people say has merit and different methods suit different personalities.
Fundamental analysis is often coupled with value investing and works on the basis that the stock market has risen overall over 50 to 100 years or more, and by buying undervalued companies you get those two advantages. A market that rises overall, and a company that should revert to it’s real value, as well as the dividends that the stock will pay to you over many years. Fundamental analysis can be dull, just looking at numbers, news and potential management or product issues, and it’s difficult to know if your decision will turn out to be right in 10 to 20 years time. A lot of things can also happen to a company in that time so you generally need to be sure you’re buying into a company with a real advantage in their market. With fundamental anaylsis your cash will be invested most of the time, meaning you’ll have very long periods where you have to find other things to do, unlike technical anaylsis which will be like having your own business and analysing markets and news every day of the week.
Technical analysis looks at why stock prices themselves actually move over a shorter period of time. The benefits of the shorter period of time is you’ll be able to analyse how well you’re doing overall much more easily because you won’t be worried about what the price will be in another 10 years time. The higher number of buy and sell orders will raise your commissions however.
The pitfall of technical analysis is the assumption that you can find patterns in the market and these will make you money. It’s not the pattern that makes the money, it’s the reason behind the pattern. Even random sequences can exhibit patterns, but that doesn’t mean you can predict if the pattern will continue with the next flip of the coin.
The ironic thing is that if a lot of other traders follow a certain technical analysis method it will generate a new pattern which you may identify that has the potential for profit. These traders themselves may barely break even sometimes but they influence the patterns that are created in the market. There are some systems that track things such as big institutional trading companies because they wield so much money and can potentially generate tradeable patterns by themselves. Whenever you think you’ve found a good trading pattern always try and justify why it might exist, and if you can’t then proceed to test it cautiously.
The most important thing you can do with any system is track your reasons for buying and selling in a consistent manner so that you can improve your techniques over time and avoid costly mistakes. Especially making the exact same mistakes over and over again.
By: Philip Mayers
