Investing in success, earning money in stocks and accumulating wealth is everyone’s main goal. Reaching that ultimate goal of retirement security requires an investment strategy that makes your money work hard for you while avoiding excessive risk, setbacks and losses. Technical analysis and fundamental analysis are the two keys to financial success, but they vary greatly in their investment approach.
Fundamental analysis focuses on the financial statements, the actual data, of the company being evaluated. To assess the value of a stock, fundamental analysis uses revenue, earnings, future growth, return on equity, profit margins, and other data to determine a company’s underlying value and future growth potential. Although fundamental analysis is important, most investors do not have the experience, desire, or time to examine a company’s financials in an effort to determine whether or not it would be a good investment. And with the accounting shenanigans that some companies have implemented to manipulate the books, the basics can seem pointless.
Technical analysis, on the other hand, is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Some technical analysts do not attempt to measure the intrinsic value of a company, but instead use charts and other tools to identify patterns that may suggest future price movements. Technical analysis was introduced over 100 years ago by Charles H. Dow from a series of Wall Street Journal editorials he wrote and later became known as The Dow Theory. The basic factors of his theory have stood for more than a century and are the basis of today’s technical analysis. Dow believed that the market discounts everything and this information shows up in the price movements of not only the market as a whole, but also individual stocks. Instant access to news in today’s world solidifies the fact that everything is truly priced into a stock’s price and market movement.
However, the smart investor must always take a two-pronged approach to be successful. In other words, use some common sense. The basic and known fundamentals of a company are readily available and are revealed in the price-earnings ratio (PE) and earnings per share (EPS). To avoid companies that fly overnight with no real profit, make sure your EPS and PE ratio are in line before you put your hard-earned money at risk. Then, with the proper knowledge of the technical analysis of the company and the market in general, 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; Graphics are the footprint of money. Technical chart analysis not only reveals a stock’s current and past performance, but also price action gives the chart a clear view of market sentiment and valuable insight into future direction. All the necessary information is displayed on the graph. 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 trader a distinct advantage. Therefore, the informed investor can limit risk and invest at the most opportune times by avoiding falling markets, market corrections, and bear markets. By using proven analysis, readily available fundamentals, and some common sense, the individual investor can be successful in any market.