Technicals vs. Fundamentals?
When I first started investing I was overwhelmed with the intricacies of a company's fundamentals and the endless interpretations of a stock chart. Admittedly I still get overwhelmed, but knowing the basics compounds.
Technical
What should have been obvious to me is gurus on social media rambling about various trading techniques. 99% of the gurus are marketing their course by creating a phony image of themselves with rented Ferraris and mansions. Trading is hard, and if a trader has a strategy that is consistently beating the market, why should he/she share it? Furthermore, if their strategy is so keen to succeed, why are they teaching a course instead of sitting at the desk making money? In my experience, these people will use complex jargon in an attempt to establish credibility and market themselves to individuals looking to make a quick buck. Many intelligent, educated people dedicated their lives to trading, they happen to not be on TikTok,
Now my ramble is out of the way, technical analysis involves gathering market data to determine if a stock is overbought or oversold and anywhere in between. Hypothetically, if a stock were to rise 20% within a week, many technical indicators like the RSI (Relative Strength Index) would give a sell or overbought signal. These signals have a history of being untruthful. A downfall of technicals is they cannot factor in catalysts that move the stock until after the fact.
Furthermore, many traders use chart patterns to determine the support levels of a stock. For instance, if a stock has a history of dipping to and maintaining a certain price, many traders would suggest that a particular price, give or take, is a support level. Usually, price levels of high support tend to be very volatile. Another popular technical tool for determining support and resistance is the 200-day moving average. The 200-day is simply the average price of the stock over the past 200 days. If a highly followed stock gets close to its 200-day, it is usually talked about. Traders will often sell into resistance, and buy around the support level.
Notice how the word traders is being used. Buying stock based on data in regard to the movement of the market requires skill and discipline. Naturally, a trader does not hold the position very long, perhaps not even for a day or an hour. “Swing” traders are in between investors with a long time horizon and day traders, who are in and out of trades. Trading is very profitable, however, it does not come without difficulty and a gut to eat losses and withstand volatility.
Fundamentals
During my freshman year of college, I would glue myself to CNBC hoping what was being said would make me smarter and help me understand business anatomy. Not the worst idea. It was similar to sleeping with a textbook underneath the pillow the night before an exam. Hearing an analyst ramble about a company’s free cash flow, EBITDA, or P/E ratio meant nothing to me. However, as my personal and academic studies began to align, it made much more sense. (I will write a blog about the various ways fundamental analysis is used)
First and foremost, fundamentals involve understanding how a company makes money and its place in its respective industry. Stating the obvious, investors look to be a growing industry. Currently, AI dominates the minds of all investors and is THE growing industry at the moment. Perhaps a bubble.
Next, investors will look at a company’s financial statements, most notably the income statement, balance sheet, and statement of cash flows. These statements help an investor derive the value of a company/stock.
Conclusion
Trading relies upon the inclinations gathered from market/stock data, while fundamentals involve dissecting business models and financial statements. I am not a fan of trading as opposed to investing in indices and ETFs. The vast majority of retail traders go broke and the likelihood of repeated success is meniscual. This is a segway to a future blog regarding dollar-cost averaging, and systematic investing.
