2. Fundamental Analysis or Technical Analysis?

When buying, I rely 80% on technicals and 20% on fundamentals (future, not historical).
During the selling process, 100% of the technical.
Here's how it works:

• Fundamentals will tell you which stock has the potential to become a big winner.
• The technicals will tell you when to buy that great stock.
• The technicals will tell you when the big guys are selling and you should get out as well.

We use the term "investor" for the fundamentalist and the term "trader" for the technician.
This is a reflection of the longer-term outlook you must have when using fundamentals.
Due to the many changes in the market, we believe that the concept of "buy and hold" is no longer valid.
There are several reasons, but consider the following:

• Years ago, the major companies were more industrial.
• They had big plants with big start-up costs.
• No one could become a competitor to General Motors overnight. It took huge resources.

Today, many of the biggest companies are in high tech, producing computers, related devices, and software.
This technology changes quickly, and almost anyone can enter the field with a good idea and some creativity.
It is the concept that two kids in a garage can bring a company to its knees!

Was there money to be made by Internet companies in the 1990s? There were stocks that literally went from one dollar to hundreds!!

In some cases,
They did this on no earnings, no earnings predictions for next year, and on borrowed money.
No fundamentalist could justify purchases in most of these. Yet technicians had a field day.

Even if you do believe that fundamentals should figure into the equation, how do you handle the realisation that we really don't know what the fundamentals are?

• Companies can twist things any way they like. What information can you believe?
• The only real-time news occurs in a closed office, when the accountant tells the CEO that they are in trouble. Everything after that is old news. By the time the appropriate people in the company are told, memos are typed, plans are made, and families and friends are told.
• After that, a press release is put together, damage control people are brought in, and, well, you get the idea.

       pic courtesy- Tradingqna

                                                                                                Source- TOI.                                                                                                                                                            

Despite popular belief to the contrary, it is the technical trader who has less risk than the fundamental investor.
In all things, we can be more certain of what will happen tomorrow than we can of what will happen next year.

• Technical traders sell losing positions as part of their philosophy.
• Fundamental investors hold the belief that all is well until the fundamentals that were the basis for their entry change.

It brings up an interesting question that many fundamentalists have a hard time answering.

• Just when do you enter a stock based on fundamentals?
• When do you take a profit?
• When do you cut your losses and move on?

The answers to these questions are usually random numbers, or they simply do not exist.
One thing that limits fundamental analysis is subjectivity!
All fundamental analysis is extremely subjective and influenced by the biases of the analyst.
Let's look at an example.

If you hold HDFC Bank shares, you want the results to be positive.
As a result, you will focus on the positive aspects of the outcome while dismissing the negative aspects as unimportant.

Similarly, if you have just sold HDFC Bank or hold a short position, you would automatically focus on the negatives and ignore the positives as immaterial.

However, stock charts, on the other hand, are far less subjective.
Stock charts are like an ECG.
Just like a doctor reads your ECG to monitor your heart's health, similarly, a technical analyst checks stock charts to monitor the health of a stock.

One misconception is that charts can only help intraday and short-term traders.

Nothing could be farther from the truth.
Instead, charts work better on larger timeframes and can be used to manage risk, time entries and exits, and pick stocks.
While the stock names are always new, new technologies keep emerging to analyse the charts, but the patterns are always the same.

Stock prices are driven by human greed, hope, and fear, and these things haven't changed since the times of the Ramayana and Mahabharata.
Technical analysis is one of the most misunderstood concepts in the world.
99% of people think that technical analysis involves drawing lines on charts and memorising patterns.

It does not.
Technical analysis is the study of the demand and supply forces behind the price movements of an asset, which helps in identifying:

• What stock should I buy?
• When should I buy it?
• When should I sell it?
• When not to do anything

So you got the idea why technical analysis has an edge. 

In an upcoming chapter, we will talk about very simple analysis that surprisingly few market participants understand.

                                                                                                                                                      The study materials required to elaborate on this topic are

• Oliver L. Velez's book, Strategies for Profiting in Every Trade.
• Momentum Investing Co.
• Zerodha Varsity.