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Fundamental and Technical Analysis

Updated on September 29, 2017
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Why invest?

I believe there are many guides and theories out there that can justify the need of investing.

While many have fallen into the dilution of Get Rich Fast or the fact that with the modern technology, everyone can be the next Warren Buffet! Truth is, the importance of investing is to grow your money fast enough to beat the inflation rate.
Imagine putting your money in your savings account and earn 0.5% interest per annum while the price of a single loaf of bread inflates at a 2~4% rate every year.

Scary? It absolutely is horrific to me! Hence, the need of investing.

Fundamental Analysis

Fundamental analysis was the way to go decades ago when stock exchanges first started and quotes were read through newspapers though it has proven to still work for many investors nowadays.

It involves a lot of research into the various industries in the market, picking the best companies in the best performing industry and digesting its financial reports. Moreover, there are fundamental indicators such as P/E, DPS, DPU etc to determine the fact that whether the company is overvalued or undervalued at its current price.

The Pros of fundamental analysis is the fact that you are most likely putting your hard-earned cash in good hands after a thorough study on the company and has compared the company's financial performances with other alternatives as well. In the long term, you can sleep well at night knowing your investments would disappear the next day.

The Cons is the knowledge, time and effort needed for you to cherry pick from the thousands of stocks worldwide. The fact that you have to go through most of the details in the financial reports scare most retail investors away especially those without any financial knowledge or background.

Technical Analysis

The other faculty of investing is the school of Technical Analysis. Trading patterns have evolved rapidly throughout the years and there are arguments that the financial reports, financial indicators etc are lagging indicators which only provides a reasoning as to why the particular instrument's prices behave. They do not provide a competitive edge for investors and hence minimizing the potential profits per trade.

Technical Analysts use algorithms, indicators, chart candle and patterns to justify their entry and exit for each trade. Rather than pronouncing themselves as investors, they are commonly known as traders, who profit from short term price fluctuations rather than adopting the longer term holding approach.

Pros: The main benefit of using technical analysis in your trading journey is the fact that it requires very minimal research into individual stocks or instruments. As long as the indicators or chart is showing bullish indications, BUY. If the instrument is showing signs of exhaustion, SELL.

Cons: There is high chance that you will be trading in a speculative instrument that has lousy fundamentals without you knowing. The potential profit is undeniably higher than purely fundamentally examined stocks, however, the underlying risk is also a lot higher than the likes of fundamental analyst.

Summary

There is a never-ending debate as to which approach is ultimately better compared to the other.

Some may prefer fundamentally sound investments while others fancy aggressive trading approaches according to their risk appetite. While both approaches have been proven to be successful according to countless case studies, I would recommend adopting the hybrid way of investing.

What it means-:

1) Do some research as to the outperforming industries in the world and shortlist fundamentally sound stocks from these industries

2) Pull out their individual charts and determine whether the current prices show early stages show signs of a bullish rally or are the prices hovering at its highs / resistance.

3) Keep a journal that updates your portfolio and be up-to-date as to the economic news and happenings around the world especially your invested region and the economic powerhouses such as China and United States.

4) Always practice stop losses if the prices break major support or the company's business performances have deteriorated.

5) Let profits run!


Lastly, do leave a comment below as to your trading / investing experiences and also any questions regarding investing.

© 2017 CHUANG YEN JEAT

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