Technical analysis I

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2. Technical analysis compared to fundamental analysis

Technical analysis is often compared and contrasted with fundamental analysis:

• Technical analysts believe that market psychology is the driving force behind share prices and that they can make money by understanding and anticipating its effect. They are not interested in what a company does, or whether it makes profits.
• Fundamental analysts believe that the key to a company's share price is its underlying performance: its products, market share, profitability, and earnings growth.

The argument about which approach is 'right' can be quite heated. Fundamental analysts, in particular, can be very dismissive of the 'pseudo-science' of technical analysis, with its funny terminology, myriad theories, and disregard for fundamentals.

In reality, both groups are right:

• Over the medium and long term, a company with consistently increasing profits will enjoy a rising share price, so if you pick good businesses and stay with them, you will make money out of your investment (the fundamental approach)
• On the other hand, share prices can follow patterns quite independent of fundamentals. If you spot a pattern, act on it, and it unfolds the way you anticipated, you can also make money that way (the technical approach).

Is it possible to be a technical analyst and a fundamental analyst? Yes, in the sense that most technical analysts check the fundamentals of a company before taking a big position on its stock, and most fundamental investors look at a share price chart to corroborate their fundamental research.

In general, though, the two approaches employ such different mindsets, techniques, and timescales, that you can't practice both with equal emphasis at the same time. Investors tend to fall into one camp or the other, and it is really a matter of which you feel most comfortable with.

1. What is technical analysis? 2. Technical analysis compared to fundamental analysis 3. What technical analysis is not 4. Dow Theory 5. Price data 6. Volume data 7. Line charts 8. Bar charts 9. Volume charts 10. Point and figure charts 11. Other types of chart 12. Trends - the basics 13. Simple trend lines 14. Making money from trend lines 15. Trend channels 16. Support and Resistance 17. Breakouts 18. Is technical analysis for you? 19. Software for technical analysis 20. Conclusion

• An Introduction to Technical Analysis - Reuters Financial Training Series
• Technical Analysis Plain and Simple
• Technical Analysis of the Financial Markets
• Martin Pring's Introduction to Technical Analysis