Tuesday, September 25, 2007

Technical And Fundamental Analysis

Advantages of Technical Analysis:

1)Recent Traded Volumes:

When an analyst/an investor is researching a stock,it's good to know what other investors think about it.

After all,they might have some additional insight into the company or they might be creating a trend.

One of the popular methods for gauging market sentiment is to look at the recently traded volume.

Large spikes of volume suggests the stock has caught attention of the traders and that the shares are under accumulation or distribution.

Volume indicators are popular tools among traders,because they can help to confirm whether other investors think same about the company.

Traders generally watch for the volume to increase as an identified trend gains momentum.

A sudden decrease in volume can suggest that traders are losing interest and that a reversal may be on its way.

Intraday charting is popular because it enables traders to watch for spikes in volume, which often comes with block trades and can be extremely helpful in knowing when large institutions are trading.

2) Tracking Short-Term Movements(Moving Averages)

when a stock goes through its 15/21-day moving average (either to the upside or the downside),it usually continues along that trend for a short period of time.

50 & 200-day moving averages are often used by TA's and FA investors to determine longer term breakout patterns.In other words, it is largely an indicator of what to expect in the coming term.

3) Tracking Reactions Over Time
Many fundamental analysts will look at a chart of a specific stock, industry, index or market to determine how that entity has performed over time when certain types of news (such as positive earnings or economic data) has been released.

Patterns have a tendency to repeat themselves, and the investors who were lured (or put off by) the news in question tend to react in a similar manner over time.

For example, if you take a look at the charts of various housing stocks, you'll often see that they react negatively when the Reserve bank chooses to forgo a cut in interest rates.

In short,by analyzing historical trends, investors can ballpark the possible reaction to a future event.

Disadvantages of Technical analysis:
1) It's History!
While it is possible to predict and anticipate certain movements based on patterns of a stock,charts cannot predict future positive/negative data,bcoz they are based on the past.

for eg:.If news leaks out that a company is about to release a good quarter results,investors will be able to take advantage of it and this good news will be apparent in the chart.

A chart cannot provide the investor with crucial long-term information such as the future direction of sales or profits.

2) The Crowd is Sometimes Wrong
it is possible that a stock that's being accumulated this week,may be under heavy distribution the next.

stocks that are being heavily sold this week may be under accumulation in the weeks to come.

Example of the "crowd is wrong" mentality can be found in the large amount of money that went into technology shares at the turn of the 2000(tech boom of 2000).

the money flow into these stocks and the stock markets on which they traded dried up almost overnight.

The charts did not indicate that such a harsh correction was coming.

3) Charts Don't Forecast Macro Trends/Future Events
Charts also are generally unable to accurately forecast macro-economic trends.

For example, it is nearly impossible to look at a Ongc's chart and predict whether govt plans to increase the prices of oil,or where crude oil prices are headed.

4) There is Subjectivity
When it comes to reading a chart, a certain amount of subjectivity comes into play.
Person may see a chart,feel that a stock is builiding a base, while another person may see more downside to it

When it comes to charting, only time will tell which way the markets will actually go.

Technical analysis can be a very valuable tool, but it is important to realize the benefits as well as the limitations before taking a plunge.

Technical And Fundamental Analysis has its merits when used as a compliment to others investing strategies.
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