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Technical Analysis Versus Fundamental Analysis |
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There are two main branches for the study of investments: (1) fundamental analysis studies a company or industry's earnings, and (2) technical analysis studies price and volume. |
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The investor who uses fundamental analysis operates in the longer time horizon. She or he is counting on the fundamental strengths of a particular company relative to its industry or to the whole economy to increase the value of its stock over time. Because even the very best companies will see their prices decline over periods of hours, days, weeks, or even months, and experience price swings that can be quite dramatic in the short term, fundamental analysis is not germane to the shorter term trader. |
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Technical analysis seeks to take advantage of these price movements. The technical analyst believes that there are recurring price patterns that can be identified and traded with a high degree of success. It is possible to trade technically with no knowledge of the company beyond what the chart tells you. |
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Remember that charts are plotting pricenot value. When you trade using technical analysis you are trading price movements, not the underlying value. |
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CSCO is a company that you might want to own in your retirement account because you think the value will increase nicely over time. But there is nothing wrong with trading it in the short term: buy at 58sell at 66short at 68buy back at 62, and on and on. You make money on CSCO going up and coming down. Your money is working harder and more productively for you. |
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As Arnold Bernhard, the founder of The Value Line Investment Survey, said in his book, The Evaluation of Common Stocks, "Stocks are not always worth what they sell for. Sometimes they are carried too high, sometimes too low, by mass excitement. Sooner or later, they move in line with value." In the interim, you can trade those price movements profitably, using technical analysis! |
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The Miracle of the Markets |
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The price of any security is set in the marketplace based on the bids and offers of many buyers and sellers. Each day, billions of shares of |
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