Fundamental versus Technical AnalysisThere are two basic means of analyzing stocks, commodities, stock options, or futures contracts. One is fundamental analysis and the other is technical analysis. The question is when do you use fundamental versus technical analysis and when do you need to use fundamental and technical analysis to most profitably predict the movement of stock prices, commodity prices, options prices or futures prices? When a biotech company invents a new wonder drug, that fact is fundamental information. So is the information about the progress the drug is making through the steps that the Food and Drug Administration (FDA) requires in order for doctors to prescribe the drug to humans. The market reacts to any new fundamental information such as a new cancer drug passing a stage three trial in about a nanosecond. Those who have done their homework will have an idea about how the new drug could be priced and how much money the company could make selling it. This use of fundamental versus technical analysis is critical as it will dictate the immediate reaction to the news. The next part of fundamental versus technical analysis will be reading the market’s reaction to the news and to the rise in stock price. At this point the use of Candlestick analysis will help the trader read market sentiment and anticipate further stock price movement.
Fundamental analysis is important in that it helps in long term investing in stocks. Investors will look for a margin of safety such as substantial cash reserves, property, and the like that will provide a cushion in case of stock market crashes or bad news specific to the stock itself. Likewise investors will look at stock fundamental analysis to calculate the stock’s forward looking income stream, its intrinsic stock value. For the investor interested in buy and hold investing this information is critical as he will rely upon its accuracy and ignore shorter term price moves. In trusting in fundamental versus technical analysis the buy and hold investor believes that by not buying stock and selling stock on a routine basis that he will save in commissions and fees. He also believes that the profits from a well run company will outperform what he could make as a trader over the years. To the extent that the investor is more attuned to fundamental versus technical analysis and to the extent that his “day job” takes all of his time this strategy makes a degree of sense. However, when the long term investor wants to buy stocks or sell stocks he is still well advised to use technical analysis tools such as Candlestick pattern formations to optimize his profits in selling stock and minimize what he pays in buying stocks.
Fundamental versus technical analysis comes out on the side of the technical trader when traders are profiting from short term stock price movement. In this case the fundamentals are known and it is market sentiment that the trader reads and anticipates by interpreting Candlestick stock charts. By reading the easy to interpret signals of Candlestick patterns it is possible for the trader to anticipate stock price movement and most profitably enter good trades or avoid bad trades. In this case of fundamental versus technical analysis the trader uses the technical tools of the market to profit in the short term while keeping an eye on fundamentals so far as they predict longer term market movement.
Market Direction: Why do most investors get mentally boggled when the market is whipsawing? Because they have not come to the realization that there will be market conditions that cause whipsawing. Knowing what to expect in these market conditions allows an investor to maintain control of their returns. Today's trading was another day whipsaw action. For the past week, the Dow has seen big up days followed by big down days and the cycle occurring over again. The Dow sold off hard early this morning, moving the prices down through the 50 day moving average which had been acting as support. The NASDAQ, which held up well on the Friday after Thanksgiving, gapped down through the tee line and continued to head down. These were indications that the sellers were now in control. There is nothing wrong with closing out positions when the signals reveal it is time to be out of the positions. Also, there is nothing wrong with buying back positions that show bullish sentiments by the end of the day.
An investor has to realize there is going to be an expected result from this type of market action. There will be losses. However, moving in the direction the signals tell you to move is the only appropriate action. Selling in the morning as prices are going down, followed by buying on the close when bullish indications are occurring an individual stock formations, allows an investor to maintain control of the positioning. Although there may be small losses during the whipsaw action, the overall profitability of the trend will be exploited when an investors mindset is that there will be times to be out and then back into a position.
Currently, the Candlestick Forum is in the process of fine-tuning stop loss procedures. This is being done with the help of the members. Having the ability to analyze the direction of the overall market greatly improves the type of stop loss procedures that should be put into place. The trending market is more apt to use the tee line as its primary stop loss level. A sideways or choppy market will require a different set of stop loss procedures. If you are interested in helping with the research for quantifying the stop loss process for specific conditions of the market, please e-mail ideas to Steve@candlestickforum.com. If you are interested in back testing specific combinations of parameters, please let us know. The major advantage of candlestick analysis is the visual aspects that allow an investor to make decisions as to when to own or not own a position.
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