Thursday, October 13, 2011

Is Technical Analysis Important?

To be frank, when I just started investing in the stock market, I thought fundamental analysis rules and that technical analysis is for short term traders. I was very wrong indeed!

Now if you asked me whether I prefer fundamental analysis or technical analysis? I'll say both! Under different market condition I'll apply them differently. For example, during the stock crash in August till now, I'm looking at the charts every day, I also focus on the macro economic news, but less on the corporate earnings because the published corporate earnings are historical figures that may still 'look nice' but its meaningless if you're at the market top (if that's your assumption).

However, during normal bull run from March 2009 to beginning of 2011, I focus more on coporate earnings than the charts because as long as the bull trend was intact, I do not bother so much about the daily fluctuations. While focusing on the corporate earnings, I pay special attention to EPS growth on a quarter to quarter basis. Most blue chip stocks have strong growth during this period, and so are their share prices.

As mentioned in my book, I Love Stocks, my favourite indicator is 20 day and 50 day moving averages to see the overall view of various markets in the world. Another technical indicator that I often use is the MACD, it is clear and absolutely suitable for our Bursa blue chip stocks.

Technical analysis is based on 2 important assumptions: (1) history repeats itself (2) the stock market is the sum of all behaviours of the market crowd. If history repeats itself, this suggest that by looking at charts, we may be able to forcast the future price movement!

Although there are over 200 technical indicators, but it's not necessarily to know them all. As the saying goes: when using the indicators, you should apply "KISS" rule, meaning Keep It Simple, Stupid or Keep It Short and Simple, which ever it is, having too many indicators will cloud your mind.

Having said that, that doesn't mean knowing one or two is enough to help you make investment decision which involved your hard earned money! The following is the list that most investors would look at:
1. moving averages
3. Stochastic
4. RSI
5. Bollinger Band
6. Volume average
7. Fibonacci retracement
8. Money Flow Index
9. On Balance Volume
10. Candlestick
11. Trendlines
12. Price patterns (Head & Shoulders, double top, double bottom)

What a list!

If possible, you may try to understand some of the famous technical analysis theories such as the DOW Theory and Elliot Wave Theory. I hope I'm not scaring some of you.

Knowing these indicators and theories is one thing, applying them well is another difficult task that requires certain amount of trading experience.

For me, I usually use fundamental analysis to identify the right stock and apply technical analysis to time the entry and exit for the stock. This way, I'm applying both and I'm quite happy with the results.

Happy investing,
Pauline Yong