Fundamental analysis and technical analysis are two basic methodologies of stock-picking. Both approaches have followers and adversaries.
Personally, I am a big fan of technical analysis. Since childhood I had a great passion in browsing different charts and graphs. I always loved sciences, especially various aspects of physics and mathematics and I was very happy to study it at university. Thus, it should not be surprising, that when I started my adventure with investing, I run into technical analysis. Today, I will shortly introduce both methodologies, but in future I will focus to post mainly about technical analysis.
Fundamental analysis.
This approach assumes that many stocks are mispriced and in the long run, the correct price would be achieved in future. Analysis is performed on past and present data related to economy, industry conditions and financial conditions of the company. Company earnings, expenses, dividends paid to investors, cashflow, profit margins and many others are all important data for fundamental analysis. The goal is to determine if stocks are underpriced or overpriced and to take proper position (buy or sell). Some of the most important measures are:
- ROE - Return on Equity
- ROA - Return on Assets
- P/BV - Price / Book Value
- EPS - Earnings Per Share
- P/E - Price / EPS
Famous and successful investor, Warren Buffett used mainly fundamental analysis.
Technical analysis.
Technical analysis uses past prices and volume to predict future price. Technical analysis doesn’t care about the ‘real value’ of stocks. Technical approach assumes that all information and data related to certain company and market are already taken into account by current price. Technicians are focused on analyzing price patterns and trends. By studying supply and demand, they are determining further directions and price movements. Among most popular techniques or theories of technical analysis are:
- Dow theory
- Elliott wave theory
- candlesticks
Among many others, one of the successful users of technical analysis is… …is Kacper Wrzesniewski (yes, it’s me), the owner of this blog.
photo credit: Petrick2005
Both approaches look contrary. They have different assumptions, analyze different data. Some investors are using both methods, as they complement each other in some ways. These investors exploit fundamental analysis to limit possible stocks to underpriced, ‘good’ companies; and technical analysis to determine entry and exit point. Investing based on fundamental analysis requires long-term approach, while technical analysis can generate signals to open or close position within weeks, days or even minutes, depending on investment strategy.
Currently, I enjoy using technical analysis. I find it fun, interesting and, what is the most important, successful for me.
March 14th, 2008 at 9:23 am
Can you give a success story of yours?
March 14th, 2008 at 9:47 am
Guerrillero,
So far, my success story with technical analysis is short. In 2007 I mostly had losses at stock market. Since January 2008 I’ve generated quite satisfying income from investing using this methodology. It looks that in March I will also have profit, despite of ‘bears’ on the market. For me, it is my small success. If I keep this level of results I will be very happy.
I plan to write few more posts about my basic tools from technical analysis and then I will focus on analysing my investing decisions. I think such case studies are very helpful and can be profitable, both for my readers and for me.
Thank you for question.
Have a nice day.
March 19th, 2008 at 10:06 pm
[...] Technical analysis is my weapon of choice I use on the stock market. It helps me to pick stocks and determine moment to open and close my positions. [...]
August 26th, 2008 at 9:47 pm
[...] I found interesting stocks which I bought. Technical situation was quite interesting and additionally, fundamental situation was very attractive. [...]