Trading Analysis of Stocks Successful Results Revealed
Trading Analysis of stocks employs different tools and models to give investors and traders the best edge. The 2 principal tools employed are Technical and Fundamental Analysis.
The market activities of the last decade provide a good look at the merits of Technical VS Fundamental Analysis.
The Dow Jones Industrial Average started the decade of year 2000 at 10, 937.74, saw a high of 14,198.10, crashed to a low of 6,469.95 on March 2, 2009, partially recovered from its low and ended the decade at 10,572.02.
Similarly, the S&P 500 Index started the decade at 1,394.46 saw a high of 1,576.09 and ended the decade at 1,136.52.
The NASDAQ Composite Index fared not better. It started the decade at 3,961.07, saw a high of 4,696.69 and ended the decade at 2,308.71.
What a ride! Many people who panicked and got out at the bottom suffered huge losses. They also lost double because inflation did not follow the pattern of the Dow; it increased.
Those whose Trading Analysis of stocks was based on Fundamental Analysis were hurt miserably. Investors who were buying and holding securities over that period saw their portfolios shrink.
Even worse were those who panicked and got out when the market bottomed in early 2009 thereby suffering and turning huge paper losses into actual loses before the market recovered partially from the bottom.
The rebound off the bottom is actually astounding – over 60% in many cases as of this writing.
For younger investors, as painful as this was, they have time on their side to play catch up. However, older investors, especially those nearing retirement saw their 401Ks and other retirement vehicles crash and badly damaged putting their retirement income in jeopardy.
Was there a way to sidestep this market collapse, especially in the final years of the decade? Yes there was! Doing a stock trends analysis or pattern analysis of stock prices and movement would have given a clue.
Proponents of Technical Analysis ride the Trend whether the Trend is going up or down and get in or get out at Support or Resistance.
Technicians following the trend would actually have made money going down and on the way back up.
It will be worthwhile to point out some of the main differences between Fundamental Analysis and Technical Analysis.
1. Fundamental Analysis focuses on:
A. Macro Economic Factors
Supply and Demand
Other Market Data
B. Company Specific data like
Valuations including Ratios of Price/Earnings(P/E), Price/Sales, Price/Book, PEG Ratio
Profitability: Gross Profit Margin, Operating Margin, Net Profit Margin
Growth Rates: EPS and Revenue
Financial Strength: Total Debt/Total Capital, Quick Ratio
Effectiveness: Return on Equity, Return On Assets, Return On Investment
2. Technical Analysis
Volume, stochastic analysis and open interest
Fundamental Analysis is very important and it predicts the long term direction of the stock. However, it has a serious flaw. It usually works with a lag. It is also difficult, even impossible perhaps, to tell when it will be driven by it’s fundamentals. The eminent Economist John Maynard Keynes put it best when he said that markets can remain irrational far longer than people can stay solvent.
Technical Analysis on the other hand offers an immediate clue as to the stock’s direction which is signaled by the behavior of the stock price. Technicians also believe that all the fundamentals of the stock are baked into the price anyway and just studying the price pattern will also justify the fundamentals.
Although there might be some credence to that, what is even more important is the fact that Technical Analysis has so many followers and users all of whom are observing the same Trends, Support and Resistance and they behave the same way based on the same observations.
In Trading Analysis of stocks, technical stock market analysis provides the rationale that makes Trends, Support and Resistance ultra important. They are self fulfilling particularly Support and Resistance Levels especially when they occur at nice round numbers.
This is because many traders do the same things at the same time resulting in a herd mentality thus confirming these Support and Resistance Levels. So if you can identify these points, you can benefit immensely.
Hence the reasons for big bounces off Support and Resistance. To get a step ahead, many professionals try to preempt some of these events.
Trading Analysis provides different but effective trading strategies depending on ones psychological make up.
To learn more about Trading Analysis, GO TO stock-trading-guru.com/technical-analysis.html [http://www.stock-trading-guru.com/technical-analysis.html] for more detailed information.
Winston has extensive knowledge and proficiency in the Financial Markets. He started trading in the Commodities Market since the mid 1990’s and has since become very active in the Stock Market.