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