There are two types of analysis that can be used for share trading:
1. Fundamental Analysis
This type of analysis is based on the use of economic data and company statistics to forecast prices. It involves reviewing company balance sheets, profit and loss statements and really studying the company, its management and its competitors to determine the actual value of the share. If you enjoy reviewing figures and interpreting data, then this type of analysis may suit you.
2. Technical Analysis
This involves reviewing actual price and volume activity of a share using charts, which helps to determine the best time to buy and sell a share. Markets move in trends and by understanding how shares trend you can determine the overall health and possible future price direction of a share by viewing its chart. A technical analyst studies the way the buyers and sellers are reacting to a share through its price movements, rather than studying the company itself.
Technical analysis can be used alone or in conjunction with fundamental analysis.
So, why technical analysis?
The reasons why I prefer technical analysis are:
- The chart tells me the overall health of the share by how it is trending. I don’t worry about news, fundamentals and announcements because financial markets have already responded to this information well before you read about it in the press. The market moves based on the future (rather than on current) earnings of a company.
- The data used in fundamental analysis can be six months out of date. Charts show the change in the trend of a share, well before any relevant fundamental information is available to the public.
- Shares such as One.Tel and HIH Insurance were being recommended by fundamentalists and brokers for a long time before they disappeared off the stock market. They were thought to be cheap and undervalued, yet these shares continued to fall and were eventually removed from the stock market as they became insolvent. For technical traders, the signs were clear in the charts that these shares were unhealthy and a clear exit signal was given a year or more before they became insolvent.
- Fundamental analysis does not take into account the underlying psychology of the market – it is people who make and move markets. The chart gives you an insight into how traders are thinking – whether they are excited or nervous and most of all if they are committed to the trend of the share. You can use these insights to make your own trading more profitable.
- I believe technical analysis gives me an edge in the market – it not only provides me with signals of the best time to buy, but most importantly it identifies the right time to exit, which is one of the most important and difficult parts of trading.
People tend to overcomplicate trading. In essence, it is simply about trading in the direction of the trend.
Copyright Smart Trading 2009
About the Author
Best selling author of “Smart Trading Plans”, Justine Pollard is a successful private Australian stock market and CFD trader, experienced trading educator and sought after trading mentor. Justine specialises in supporting traders to become peak performers in the market.
Justine has been interviewed in many media articles and included in top trading books such as “20 Most Common Trading Mistakes”, by Kel Butcher and “Real Traders, Real Lives, Real Money”, by Eva Diaz.
If you are looking to start trading or have been struggling in the markets then go online now to get Justine’s FREE special report – ‘10 Tips to Smarter Trading’ – www.smarttrading.com.au
