Stock market analysis – Fundamental vs Technical analysis
There are two major analysis types with the help of which we can do successful investment and trading .
One is fundamental and other is Technical .
In general , our aim must be to combine both the analysis and get the best results out of it .
Fundamental Analysis –
In fundamental analysis , we check the balance sheet of the companies , thus checking profits and loss of the company , which enables us to identify the financial health of the company . It is just like a medical report , which helps us to know how health of sick a person is .
Most people believe that by checking the fundamentals , if we invest money in such stock , they will get immediate results . But this is not the case every time . There are stocks that looks fundamentally strong , but remain laggards for long time .
Just on basis of good results one cannot plunge into the stock Immediately . There are lots of factors that one must analyze before taking a decision .
Metaphorically speaking if we take a company as a certain make of car , they its fundamentals are the fuel that drives the company , and technical factors are the drivers . You may be having a great make of car , if the fuel is of low quality , and the driver is weak , then you cannot get far in that car . the fuel of the car means various positive developments in the company , which could be good results , or long term positive orders . Now how far the car goes , where does it take halts , and in which direction it goes , depends on the driver too .
The performance of the vehicle is impaired depending on the quality of fuel . A vehicle with high quality fuel can give better performance , same way a company witnessing great result can give better result in longer run . when a great vehicle is backed by great fuel and great driver , it goes far in the race . We must try and spot such combinations . with the help of technical analysis we are able to take advantage of short term as well as long term cycles .
What we also need to understand is that a good vehicle tends to get a good driver . As such if you ask a driver to select between a old truck and Mercedes , he will obviously choose mercedes same way a good stock manages to get a good technical drivers .
To know the make and condition of the vehicle ,we have to take the help of fundamental analysis . Based on technical strength , an old truck can also race , and Mercedes can also zoom . but when the things go wrong , or a reality check is done , you can get stranded in an old truck , whereas you face little difficulty being in a Mercedes .
As when driving in Mercedes , when you face a rough road , you have minimal feeling of terrain , same way in a fundamentally and technically sound stock , when markets face tough times in short terms cycles , they are somewhat immune ot the adverse effect during such periods .
Like wise when riding a Mercedes , even in an event of accident , your chances or survival are high , whereas in an ordinary car , such accidents mostly prove fatal .
Same way when good stocks decline a bit , they recover as fast , whereas much penny stocks after declining may never rise again , or even can go bust , where they are de – listed and no longer traded .
That is why always you are advisable to put money in fundamentally good stocks .
In stock market if we focus on what , rather than why , it can save lot of time and energy . Charts covers all the aspects into it . So if we focus on the trend , and stay invested till trend remains intact , and if we have loss cutting mechanism in place , we need not worry about why the stock is moving up as long it is moving up .
Any stock we invest must be liquid enough to give us opportunity to exit when we want to . so the only thing we need to have to weed out speculative stocks having very low volumes . As at any stages the volumes can dry up , even if price is good , there is no buyers , which can lead to consistent seller circuits , and you are not able to do anything but watch helplessly .
Technical Analysis –
Technical Analysis is the examination of past price movements to forecast future price movements .
A technical analyst believes with the help of charts it is possible to identify a trend , invest or trade based on trend and make money as the trend unfolds . Objective of technical analysis is to forecast the direction of the future price . It serves the purpose of a map .
When we set out on a trip , if we venture into unknown terrain without a map , twe can get lost . Some way without proper study if we invest or trade in market . It is like trying to aim by firing in dark .
Short term traders can take advantage of charts by knowing short term supports and resistances , and make the most of it .
Long term investors can use technical analysis to know the long term trends , so that they can stay invested , and cancel out the short term volatilities , which could make them , worry .
On the other hand short – term trader can use the same volatility to their advantage , and based on various support and resistance , they can trade various ranges ….
If we take the market as a battlefield , then technical analysis serves the purpose of weapons . If we enter into the battlefield without any weapons at hand , the result is evident to all . So without the knowledge of technical analysis , if you enter the stock market , it is like entering the battlefield bare handed . To do so is not courage , but foolishness . If you want to win in stock market , you have to acquire the necessary skill to win in it . in our upcoming blog we will cover all the topics for this .
Why more emphasis on Technical Analysis ?
As we can see today , that investing just on the basic on fundamental analysis has also become a hazardous thing to do . Companies can manipulate their balance sheets , and take their share prices to the roof , but when the bubble bursts , the same company can go bust faster than it went up .
During such times , “ what do you think “ is a question , which no one can answer , in fact it is a question that becomes irrelevent in such circumstances .
Under such circumstances , when a major level is broken one has to exit immediately . with the help of technical analysis we can do this .
This does not mean that all companies manipulate their balance sheet . So we must never ignore the fundamentals but keep a balance and based on technical signals take right decisions .
Even when fundamentals look good , if there is some problem , most of the time , you can spot it in the charts .Even if you are sitting in the best car of the world , if it starts going downhills , you have to jump out of the car . At that time you have no time to think .
The main basis of technical analysis is the rise and fall of prices and the charts that are prepared from such price data. By combining various type of charts and indicators it is decided whether it is the right time to enter or exit a stock .
To decide whether a particular stock is at top or bottom in a selected time frame , charts are used .
Those who are long term investors , they can ignore the short term ups and downs , and focus on long term trend and stay invested in stocks . when there is a long term trend reversal , only then they exit a stock . Those who do not have enough time to invest they must stay away from short term investing and trading . It is a matter of our choice . Technical analysis gives us both the options .
In a given time frame , how much stock will rise , where it face resistance , how much it could decline where it can take support , all can be known . if you follow the technical signals religiously too , you can avoid accidents , that is big loss in stock market .
