Thursday, December 11, 2008

Technical Analysis vs Fundamentals

I have shared some methods to invest before ...
Those are within the category of fundamental analysis.  Basically you are trying to understand what a business is doing and how it 'may' perform in future.  Fundamentalist is trying to differentiate the big and important factors from the smaller factors or rumors ...
Sometimes even though the fundamental of a business is strong but its stock price may still go down if the demand is suddenly drop while the supply remains the same.  So even a totally rediculous rumor can affect stock price seriously in a particular time, as long as the demand believes it.  As the description of this blog mention, 90% of the people will take silly rumors as truth.

Fundamental also include effect of news.  If a company announces good year end result, its stock price may most probably go up.  However, you may observe that the stock price actually go up even before the announcement is made - its called react before the news.

As you may see now, fundamental analysis is great for long term wealth accumulation from time A to time B.  However, there may be a lot of ups and downs in between.  If you are able to catch the ups and downs in between you may be able to gain more, like wise if you 'guess' wrong, then you may lose more than what long term gain can get you.
You may NOT be able go guess right the lowest and the top points EVERY times, but there is a SYSTEMATIC / Statistical way to identify (1) end of the lowest point and (2) the end of the highest peak.

In other words, you may use Technical Analysis to catch the
(1) after lowest point and
(2) after the peak

The idea is this ... no matter if it is rumor or insider news, it will be reflected on the actual buy and sell price.  That's why Technical Analysis can NEVER catch or predict the actual bottom or peak, but it can usually catch the after effect.

If all these are TRUE, this is what you can do to lower your risk while maintaining your reward.
1.  use fundamental to filter out which stock to buy ( can keep long term )
2.  use technical analysis to 'further' narrowing the 'in' and 'out' timing.

... stay tune ... you are able to reach the 'sure win' arena ...