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The Best Way to Invest: Fundamental or Technical Analysis?

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The Best Way to Invest: Fundamental or Technical Analysis?

Post by nihal123 on Sun Apr 19, 2015 11:40 pm

Ralph Seger once said, “One way to end up with $1 million is to start with $2 million and use technical analysis.” I find this quote amusing. A lot of people feel very strongly that technical analysis is about as useful as voodoo for helping you figure out the best investments for your money. I happen to disagree, but before I tell you why, let’s take a look at some of the differences between fundamental and technical analysis of investments.

In a nutshell, you can think about fundamental analysis as the more logical, pragmatic part of investing in which you are looking at the financial soundness of a company and its business prospects. Technical analysis, on the other hand, can tell us a lot about the psychological aspects of the market by analyzing past market movements in the company’s stock to forecast future movement. You can buy a position in a fundamentally sound company, but if its shares have already run up a lot, you could still find yourself in a losing position on a pullback, something you could have potentially avoided through the use of technical analysis.

Fundamental Analysis

If you use fundamental analysis to decide where to invest your money, there are many different metrics you can use. Here are a few of the basics:

Revenue

This is just the amount of sales a company has taken in over a set period of time, usually reported on a quarterly and annual basis. The key here is to look at the direction of revenues. Obviously, rising sales are a good thing. If sales have fallen, it’s important to note why that might be. Does it look like the drop is a one-time glitch, or is it possible that sales could continue to fall due to the success of a competitor, or decreasing demand for the company’s products? Does a rise in sales in the fourth quarter necessarily mean the company’s prospects are looking up, or is it simply a seasonal uptick due to the holiday season.

Earnings Per Share (EPS)

While revenue is important, earnings are really the bread and butter of corporate success. If a company’s sales are increasing, but they are not able to retain those revenues due to excessive expenses or poor management, that’s a red flag. You want to invest in companies with rising margins, and therefore rising EPS. You can find historical EPS for most companies as well as EPS estimates for future quarters on most investing websites.

P/E Ratio

The price to earnings ratio of a company is simply the current stock price divided by its annual earnings per share. So if company XYZ is trading at $27 and it earned $1.50 per share during the past 12 months, its P/E ratio would be 18. That means it’s trading at 18 times its annual earnings.

When analysts refer to a company’s valuation, they are often referring to its P/E ratio. What’s a good P/E ratio? That can depend on who you ask, and it can also vary by sector. For example, high growth stocks like those of technology companies often trade at much higher P/E ratios whereas stable, lower growth companies trade at lower valuations. This should make sense intuitively because if a company has huge growth prospects, then one should be willing to pay a much higher price relative to its current earnings. Analysts often disagree on what constitutes a cheap stock because there is so much debate about what a specific P/E ratio actually means for a given company or industry. There is no “one size fits all” when it comes to P/E ratios.

Sector Fundamentals

A single company’s performance can be heavily influenced by the sector in which it operates. During economic slowdowns, for example, “defensive sectors” like consumer staples and utilities tend to do better, whereas technology, transportation and financials do better when the economy is on an upswing.

The Big Picture

It’s always a good idea to keep the macroeconomic climate in mind when choosing your asset allocation as well as your specific investments. Where are we in the economic cycle? Are we at the beginning, middle, or end of a recession or boom? I like to think about the macro view like the weather; it may not change what you need to do, but it should affect how you do it.



Technical Analysis

While fundamental analysis is much more qualitative and involves more subjectivity, charts are the main tool of technicians. Here are a few chart-watching basics:

Price Trends

Is the price of the stock moving higher or lower? How long has it been doing so? Many chartists will only buy securities that are in uptrends. They may wait for a short-term downtrend to enter, but won’t even consider the stock if the longer-term trend is lower.

Volume

I’ve often said that charts are like a Rorschach (ink blot) test for the market, but volume is its lie detector. Volume can tell us how strong the prevailing trend might be. Decreasing volume can be a sign that the trend might be on the verge of a reversal.

Moving Averages

Adding moving average lines to a chart can help determine the overall trend direction. A moving average line simply plots the average price of a security over a set period of time. For example, the 50-day moving average indicates the average price over the past 50 days. Technicians like to buy when the moving average is trending upward and the price pulls back a touch to allow for a good “entry point” into the stock.

Indicators

You will often see a variety of technical indicators above or below a chart. These can indicate whether a security is overbought or oversold as well as the strength of its momentum. There are too many indicators out there to follow all of them. A few of the most common are: stochastics, Moving Average Convergence-Divergence (MACD), and Relative Strength Index (RSI).

Which Is Better?

For decades, fundamental analysis was the only investment method that was given any credibility. That has changed as the advent of high-speed computing has made technical analysis easier and more widely available. Many large investment firms use black box trading, or computer modeling, to determine their entry and exit points.

That means that many of the largest market players are making their trading decisions based on computer algorithms. In fact, some estimate that computerized trading represents up to 70% of the volume on exchanges today. Like it or not, your investments are moving based on technical factors as much as fundamental ones. The markets have changed, and we need to change our strategies with them.

The best approach to investing likely involves some combination of fundamental and technical analysis. I like to choose stocks or sectors that have strong fundamentals and then use technical analysis to help me decide when to buy or sell them.

http://www.moneycrashers.com/the-best-way-to-invest-fundamental-or-technical-analysis/

Which investment method do you prefer?
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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by කිත්සිරි ද සිල්වා on Tue Apr 21, 2015 3:36 pm

Thanks Nihal.
Nice one. Very Happy
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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by chutiputha on Tue Apr 21, 2015 3:40 pm

Thank You Nihal Ayya,This is very important to me for build up basement to make strategical plan on next coming era. + for u Smile
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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by Backstage on Tue Apr 21, 2015 8:45 pm

Thanks Nihal. I think you are now easing the load for Sri and FG. Keep it up.
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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by serene on Tue Apr 21, 2015 9:19 pm

Backstage wrote:Thanks Nihal. I think you are now easing the load for Sri and FG. Keep it up.

True.
Keep it up mate. bounce Basketball cheers

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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by nihal123 on Tue Apr 21, 2015 9:52 pm

Thanks mates
Today Sri went to negam. So no CSE updates some one pls do that.

Very Happy
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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by nihal123 on Tue Apr 21, 2015 10:13 pm

Best Investment Approach: Technical Analysis vs. Fundamental Analysis

By  Joel Anderson +Follow January 15, 2014 9:00AM Share:
SubmitIt's a jungle out there for the retail investor and getting solid advice is difficult. The underlying problem is that one thing is generally true about anyone writing about the stock market or offering up professional investment advice: if these people really had all the answers, they would be extremely wealthy and most likely not working as financial writers or investment advisers.
However, that doesn't make it any easier to wade through the ocean of different advice and strategies that are out there. Just because a strategy works in one case doesn't mean it will work in another, and someone can give a series of solid pointers on stocks or strategies before being incredibly wrong when it counts.
Legendary stock-picker Peter Lynch may have put it best: "In this business if you're good, you're right six times out of 10. You're never going to be right nine times out of 10."
However, because one still needs to figure out some sort of investment strategy, here's a look at two major investment approaches to evaluating potential strategies that often times conflict with each other and both still have a number of adherents despite the conflict.

Technical Analysis vs. Fundamental Analysis

Fundamental analysis is pretty, well, fundamental. At its core is the belief in researching the specific nature of the business being invested in and focusing on this as a means for deciding on investments. The aforementioned Peter Lynch insisted that one should invest in what they know, buying stock in companies that make products familiar to the investor and that demonstrate a clear value.
Fundamental investors will focus on market trends, the underlying economy, a comany's balance sheet and management, all the specific data about what a company is, what it does, and how it's doing it.
Technical analysis comes from an entirely different school. A pure technical analyst operates in a relative vacuum, ignoring what a company is and does and focusing entirely on the information about how the company's stock has performed over time. At its core, technical analysis is based on the idea that the equities market is its own economy and the millions of investors out there will act in certain predictable ways.
People will tend to sell stocks they see as reaching their peak and buy stocks perceived as bottoming out almost regardless of what company that is. Through a focus on trends in the market and mathematical analysis of calculations like moving averages, resistance and support levels, and the underlying patterns that emerge from these, a technical analyst attempts to predict fluctuations share prices and profit from them.
In the end, it's about people's behavior. People who are buying and selling stocks tend to do so in ways that develop certain somewhat predictable patterns. What's more, because those very same people have learned to recognize those patterns, they can start to become self-fulfilling. People know a downward wedge is a bullish pattern, making them bullish on the stock, making it more likely that the bullish pattern will result in an upswing in the end.

And the Winner is...

Neither. As is almost always the case when two schools of thought coexist in one space, both systems have benefits and blind spots.
A technical analyst might find the perfect stock ready to rebound in a sugar company that's right at its 52-week low, hitting resistance, and has moving averages that indicate its poised for a break-out, but it's not gonna mean diddly if the price of sugar collapses or a hurricane decimates the company's operations.
Meanwhile, a company might have a solid business model and a product that no one can do without, but if the share price has been driven up by rapid buying for the last few months an investment might still lose money when the market corrects itself regardless of the inherent value of the company.
The best strategy most likely involves some combination of both, looking at both how the market is treating a stock while also considering the fundamental value of the company beneath it all. There are plenty of examples of very wealthy people who made their money purely through fundamental or technical analysis, so ignoring one or the other is something an investor does to their own peril.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by serene on Wed Apr 22, 2015 7:54 am

Thanks Nihal.

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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by nihal123 on Wed Apr 29, 2015 6:59 am

International Journal of Marketing, Financial Services & Management Research________________________ ISSN 2277- 3622
Vol.2, No. 5, May (2013)
Online available at www.indianresearchjournals.com
44
A STUDY ON FUNDAMENTAL AND TECHNICAL ANALYSIS
MR. SURESH A.S
ASSISTANT PROFESSOR,
MBA DEPARTMENT,
PES INSTITUTE OF TECHNOLOGY,
BANGALORE SOUTH CAMPUS,
1KM BEFORE ELECTRONIC CITY,
HOSUR ROAD, BANGALORE

Pls see below web

http://indianresearchjournals.com/pdf/IJMFSMR/2013/May/6.pdf
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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by nihal123 on Wed Apr 29, 2015 7:02 am

Technical Analysis vs. Fundamental Analysis – Which is better

Technical Analysis vs Fundamental AnalysisIn the world of stock analysis, fundamental and technical analysis are on completely opposite sides of the spectrum. Earnings, expenses, assets and liabilities are all important characteristics to fundamental analysts, whereas technical analysts could not care less about these numbers and only focus on price and volume. Which strategy works best is always debated, and many volumes of textbooks have been written on both of these methods.

A Technical Analyst would criticize Fundamental analysis as they consider it worthless because company numbers are frequently cooked and they only come out once a quarter. Government statistics usually have a huge lag time, sometimes months after the time period in question. A Technical Analyst would rather look at market information (price and volume) only. This is where true information is as the institutional buyers have a better inside track and will buy/sell in huge volumes based on their inside knowledge. Therefore, a retail investor should buy things that are going up and sell things that are going down.

A fundamental analyst would say that technical analysis ignores all the valuable information about profit, dividends, growth rates and other information that any CEO would use to judge the value of a company.

The bottom line is that you should do some reading for yourself and figure out which system you feel most comfortable with.

Key Terms

Fundamental Analysis – Fundamental analysis looks at factors like balance sheets, income statements, profit ratios, the economy, etc.
Technical Analysis – Primarily focuses on stock price and the volume of stock purchases and sales.
Technical Indicators / Chart Patterns – A list of Chart Patterns that professional WallStreet traders use on a daily basis.
Chart Analysis – Focuses on the same factors as a Technical Analyst.
Recommended Reading

Bond Bubble Will Be Bigger Catastrophe than Real Estate Bust

http://education.howthemarketworks.com/articles/technical-analysis-vs-fundamental-analysis-which-is-better/
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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by serene on Wed Apr 29, 2015 7:49 am

Thanks Nihal. Good one.
Tech Vs Funda..
I'm in to Fundematals Just becauze I'm not expert in Tech..
could be both of it in future If I could master the tech..

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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by malanp on Wed Apr 29, 2015 7:57 am

thanks Nihal,, very good articles..

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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by smallville on Wed Apr 29, 2015 9:08 am

imo - u need both for a solid investment... Funda to identify companies with strong financial positions and Tech for entering those at good times.

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I take risks as a Trader and I select stocks based on Tech and daily Cash in/out. Therefore, my methods may not suit u.. so DYO analysis before making any decisions.
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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by serene on Wed Apr 29, 2015 9:28 am

smallville wrote:imo - u need both for a solid investment... Funda to identify companies with strong financial positions and Tech for entering those at good times.
Agreed 100%.

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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by Ethical Trader on Wed Apr 29, 2015 12:12 pm

Thanks Nihal for sharing two good articles.

In addition to FA & TA I would like to add Socio-economic analysis and Sentimental analysis too for successful investment. These help you in ultimate decision making.
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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by nihal123 on Wed Apr 29, 2015 9:46 pm

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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by xmart on Wed Apr 29, 2015 9:56 pm

Well, thanks for bringing up a timely topic Nihal.

Let me start with traders. Technical analysis is the holy grail for traders. but problem with CSE is that the market is so small and illiquid. therefore sentiment, news and manipulation work better in CSE. but that doesn't mean you can't use technical analysis for CSE. in general condition and it work well. but with some sensitive stages you have to look for other factors as well.

ok, now about investors!

guru said invest in something which you would like to hold for next 10 years if the market is shutdown. but most of us do not go for that horizon in most cases. therefore, you can valuate your pick using any or all valuation methods and then use technical charts to get the bottom price to enter.

its all about minimizing the risk and identifying trends even before the trend identify the stock!

cheers..
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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by First Guy on Thu Apr 30, 2015 7:55 am

[quote="xmart"]
its all about minimizing the risk and identifying trends even before the trend identify the stock!

Nice one
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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by malanp on Thu Apr 30, 2015 8:18 am


Use common sense together with fundamental analysis, that is the lesion I learnt so far..

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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by smallville on Thu Apr 30, 2015 8:18 am

good one Nihal.. Smile

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Re: The Best Way to Invest: Fundamental or Technical Analysis?

Post by කිත්සිරි ද සිල්වා on Thu Apr 30, 2015 9:04 am

Thanks Nihal & Xmart too. Very Happy
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