Investing success, earning in stocks and accumulating wealth is everyone’s primary goal. Achieving that ultimate goal of retirement security requires an investment strategy that will make your money work hard for you while avoiding excessive risk, failure and loss. Technical analysis and fundamental analysis are two key points for financial success, but they differ greatly in their approach to investing.
Fundamental analysis focuses on the financial statements, the actual data of the company being evaluated. To estimate the value of a stock, fundamental analysis uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company’s underlying value and potential for future growth. While fundamental analysis is important, most investors do not have the expertise, desire or time to study a company’s financials in an effort to determine whether or not it would be a good investment. And with the accounting shenanigans some companies have implemented to prepare the books, the basics can be seemingly worthless.
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 a company’s intrinsic value, but instead use charts and other tools to identify patterns that may suggest future price movements. Technical analysis was introduced more than 100 years ago by Charles H. Dow in a series of Wall Street Journal editorials he authored and later became known as The Dow Theory. The basic factors of his theory have been valid for more than a century and today are the foundation of technical analysis. Dow believed that the market discounts everything and this information appears in price movements not only in the overall market, but also in individual stocks. The instant access to news in today’s world reinforces the fact that everything is really down in the share price and market movement.
However, a wise investor should always have a two-pronged approach to be successful. In other words, use some common sense. The company’s basic, familiar fundamentals are readily available and revealed in the price-to-earnings (PE) and earnings-per-share (EPS) ratios. To avoid fly-by-night companies with no real earnings, make sure your EPS and PE ratio are in line before you put your hard-earned money at risk. Then, with proper knowledge of the technical analysis of the company and the overall market, a truly wise investment decision can be made.
There’s an old saying: “If you want to know the truth, then follow the money.”
The truth is; charts are the money trail. Technical chart analysis not only reveals a stock’s current and past performance, but price action also gives the chartist a clear view of market sentiment and valuable insight into future direction. All the necessary information is shown on the chart. Price, volume, support, resistance, trends and more. It is simply a matter of knowledge in the correct interpretation of information. Charts and technical analysis use the foundations of Dow theory and implement modern charting techniques to give the investor a distinct advantage. Therefore, an informed investor can limit risk and invest at the most opportune moments, avoiding market crashes, market corrections, and bear markets. By using time-tested analysis, readily available fundamentals and common sense, the individual investor can be successful in any market.