Re: Which one do you use? Technical or fundamental analysis
Well done Bunyip
Very well done
Re: "Which one do you use? Technical or fundamental analysis"
Do you cover one eye when you drive your car?
Do you use only one pedal when riding a bike?
Why not use all the tools at your disposal?
Technical analysis is a good way to find new stocks/ companies that you may not have been aware of & get in ahead of the crowd.
Finding new companies with good Fundamentals often means reading a report ie- the sheep are already aware of it.
TA is good for making entries & exits ie making a buck shorter term
FA is the retirement accumulation way of patiently building a nest egg.
Different strokes for different folks.
Personally I am much more dependant on TA because I don't have a steady income stream for investing long term but
I never buy a share without checking the basic fundamentals.
I find no fault with 'checking the basic fundamentals' as a way of substantiating the technical view.
But bear in mind that technical analysis in its purest form is, in effect, a method of fundamental analysis anyway.
TA has been bastardised to some extent in recent years with the invention of hundreds of so called 'technical indicators' that put squiggly lines on your chart, but which provide limited value in my onion.
Pure TA examines price action rather than indicators, and more specifically, the trend or direction of price action. The trend of price action is determined by what thousands of people think of a particular stock or market. And what they think of a stock is largely based on what they know about the fundamentals of that stock.
If a blue chip stock is rising solidly in a clear uptrend, the most obvious reason is that it's coming under heavy buying pressure because thousands of people believe it has good fundamentals.
If a blue chip is being sold off and pushed downhill, chances are that thousands of investors have uncovered negative fundamentals for that stock.
Hence, by studying trends of blue chips stocks, we can get a pretty fair idea of the fundamentals.
We can take this a step further by using the 'top down' approach that looks firstly at the trend of the overall market, then examines the trend of the main market sectors, then finds the strongest trending stocks within the strongest trending sectors.
This gives us a short list of the outperforming stocks - the ones most likely to provide us with decent gains. Most of these stocks will have strong fundamentals, and we didn't have to spend one single minute of our time doing fundamental research to find them.
All we needed was software with the ability to do
'relative comparison' scans.
A man called Nick Darvas decided to try his hand at trading stocks back in the 1950's. After a somewhat shaky start, he made 2 million dollars over the next several years - equivalent to perhaps 60 to 80 million dollars in todays values.
He outlined his method in his book
'How I Made Two Million Dollars In The Stockmarket'.
Darvas first traded from tips - it seemed that just about everyone knew a good stock to buy. Darvas bought all of them.....and quickly found out that trading from tips was a fast road to the poor house.
Next he decided that company research must be the road to profits. He conducted exhaustive fundamental research to help him decide which stocks to buy.
To his surprise and dismay, he once again lost money.
His next idea was to trade from broker recommendations - he figured that as professionals in the game, brokers would have access to far better research and information than he had, and would be able to recommend stocks that were likely to perform well.
Same result - Darvas lost more money.
By this time he was just about at his wits end - he'd done nothing but lose money after 18 months of trying everything he could think of to extract profits from the market.
One day he was trolling through the stock quote pages, wondering how he'd ever make money out of the game, when he noticed a stock that had been moving solidly upward on heavy volume for the last few weeks.
He'd never heard of the stock, but he figured that if lots of people were buying it and pushing the price up, there must be something bullish about the fundamentals.
He took a punt and bought it, and made an impressive profit.
At first he could scarcely believe that making money could be as simple as buying a stock that was in favour. He repeated his experiment with another stock, and another and another, each time buying purely on price action and volume. No fundamental analysis of his own - he simply looked at the trend of the stock to get a summary of what people thought of its fundamentals.
He was employing 'relative strength comparison' in its simplest form....finding outperformers by comparing the strength of individual stocks relative to the strength of the overall market.
He simply bought into these outperforming stocks, and hitched a ride on the trend until they stopped performing. His results were spectacular.
I used a similar strategy in my stock trading days, with just a few refinements such as sector analysis. I can't claim to have made 80 million dollars but I achieved results that were not to be sneezed at. It definitely works.
Now I use basically the same approach to trade Forex....find a currency pair in the early stages of a solid new trend either up or down, jump on and hitch a ride until the trend runs out of steam.