Fundamental Analysis Vs Technical Analysis

Some of you have asked me as to why I don’t include an analysis of the current or expected economic environment, for example European crisis, corporate results etc. The simple reason to that is, we use Technical Analysis and NOT Fundamental Analysis. Fundamental Analysis focuses on the fundamentals of the company, economy and industry that it operates in.

Attempting to provide difference in Fundamental and Technical analysis, let’s review both-

Fundamental Analysis:
• Based on economic, industry and company information. Examples:
- What industry or business the company is in
- Financial information i.e. profits, revenue, operating margins
- Government regulations and changes
- Competition
- Dividend pay out
- Cash reserves and situation
• Picking stocks that are best performing in their industry or sector
• Brokers, fund managers have many specialists studying fundamentals

Technical Analysis:
• Use of price history to identify common patterns or change in trends
• Charting the primary tool
• Price action and reaction, support and resistance
• Indicators are used to forecast price movements

Technical analysis is based on the premise that all the information related to any stock or market is reflected or inbuilt in its current price. Technical charts can give you early warning / indications of any change in direction of price movement.
While both analysis may be good and I don’t advocate using any one of them, I prefer to use Technical analysis for various reasons.

Firstly, industry knowledge is required for Fundamental analysis. So, if you want to trade in 10 stocks from 10 different industries, you need to know all the industry.

Then, it is very time consuming because there are piles and piles and piles of information. I don’t have access to most Company’s information. By the time it is known to me or general public, it’s too late. All said and done about stopping Insider Trading, it still happens. One can always trade in a friend’s account who is not barred due to insider trading regulations applicable to you.

The information available is subjective to a lot of factors and may not be reliable. Information can be outdated too.

There are different styles of management for different companies and that might have an impact on the operations of the company, which may again be known to me post it has happened.

Technical charts can provide you advance information about a company. You can see it all on charts. I would just share a real example from my trading.

It was an early morning of July 2007. I had been a student of Technical analysis for less than 9 months. Around 8 am, I was scanning various stocks and came across the chart for GMR Infra. I don’t read newspaper (though at that time I had subscribed to Economic Times, most of which were never unfolded!) I checked with my wife as to where the ET for the day was. She was surprised “Aaj to ET ki kismat khul gayee. By the way, why do you need a newspaper”. I said, “there is some big news on GMR Infra”.

I couldn’t believe it! There was this news of GMR Infra bagging a $2.7 billion deal for Istanbul airport. Eureka!

How did I know this from chart?

I noticed an unusual spike in volumes of GMR Infra without much significant move in the stock. That day, the chart were providing a Buy signal (on my trading system). I went ahead and bought one lot of GMR Infra (1000 shares) @ Rs. 757 putting up Rs. 1.2 lakhs as margin money on July 10. I sold the lot @ Rs. 940 2 days later i.e. on 12th July, making a profit of Rs. 1.8 lakhs.

A whopping return of 150% on my investment in 2 days.

The point of sharing above example is not to brag about my ability to see a great profit making opportunity or how much money did I make or that it can be done every time. Idea is to demonstrate what technical charts / analysis can tell you in advance which you may come to know much later in Fundamental Analysis.

That was the day, when technical analysis became my preferred way to stock analysis, and I knew, it was my vehicle to acquiring unlimited wealth!

www.sumitkgupta.com