Fundamental Analysis Vs Technical Analysis
Investing success, making money in stocks, and accumulating wealth is everyone’s primary goal. Reaching that ultimate goal of retirement security requires an investment strategy that will make your money work hard for you, and at the same time avoid excessive risk, setbacks, and loses. Technical analysis and fundamental analysis are the two key points to financial success, but vary greatly in their approach to investing.
Fundamental analysis focuses on the financial statements, the real data, of the company being evaluated. To assess the value of a stock, fundamental analysis uses the revenues, earnings, future growth, return on equity, profit margins and other data to determine a company’s underlying value and potential for future growth. Although fundamental analysis is important, most investors do not have the expertise, the desire, or the time to peruse a company’s financials in efforts to determine whether it would be a good investment or not. And with accounting shenanigans some companies have implemented to cook the books, the fundamentals can be seemingly worthless.
Technical analysis on the other hand, is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Some technical analysts do not attempt to measure a company’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future price movement. Technical analysis was introduced more than 100 years ago by Charles H. Dow from a series of Wall Street Journal editorials he authored and subsequently became known as The Dow Theory. The basic factors of his theory have held true for more than a century and are the foundation of technical analysis today. Dow believed the market discounts everything and this information shows up in the price movements of not only the over-all market, but individual stocks as well. Instant news access in today’s world solidifies the fact that everything truly is discounted in the price of a stock and the movement of the market.
However, the wise investor should always take a two-fold approach to be successful. In other words, use some common sense. The basic, known fundamentals of a company are readily available and revealed in the Price Earnings Ratio (PE) and the Earnings per Share (EPS). To avoid the fly-by-night companies with no real earnings, make sure the EPS and the PE ratio are in line before putting your hard-earned cash at risk. Then with proper knowledge of Technical Analysis of the company and the over-all market, a truly wise investment decision can be made.
There is an old saying, “If you want to know the truth, then follow the money.”
It is true; charts are the footprint of money. Technical analysis of the charts not only reveal the current and past performance of a stock, but also the price action gives the chartist a clear view of market sentiment and valuable insight as to the future direction. All necessary information is displayed in the chart. The price, volume, support, resistance, trends, and much more. It is simply a matter of being knowledgeable in interpreting the information correctly.Charting and Technical Analysis uses the foundation of The Dow Theory and implements modern day charting techniques to give the investor a distinct advantage. Thus, the informed investor can limit the risk and invest at the most opportune times avoiding markets declines, market corrections, and bear markets. By using time-tested analysis, readily available fundamentals, and some common sense, the individual investor can be successful in any market.