All you need to know about investing short and simple
© Leonardo Timis
CHAPTER 5
DIFFERENT TYPES OF ANALYSES
5.1 Introduction
There are two types of investment analyses: ‘technical’ analysis and ‘fundamental’ analysis.
With analysis, we mean the way we do our research before choosing an investment. It is like putting a pair of glasses on before seeing the world. In this case, we have two different pairs of glasses, ‘technical’ glasses, and ‘fundamental’ glasses.
5.2 Technical analysis
To better understand both analyses, we start with the technical one.
When we decide to put on the technical glasses, we see only the price of the financial instrument we are studying. When we adopt this analysis, we look only at the way the price moved in the past before reaching the present price - sometimes technical investors look also at the number of stocks traded in a specific period of time (i.e., ‘volume’) besides the price, but the price is the most important variable we look at in technical analysis.
The most common technical analysis is the ‘trend’ analysis, which means looking at the way the price has been moving (up or down) until now, then decide if it was time to buy or to sell – usually after the price breaks a specific price threshold.
There are a lot of technical analyses around, some more elementary and some more complicated, but all technical investors believe that the past price can predict the near future price.
5.3 Fundamental analysis
5.4 Conclusions
What is better? Technical or fundamental analysis?
They both look at the past to predict the future, but a technical analysis focuses on the price, and a fundamental analysis focuses on the fundamentals.
The answer to the question is ‘it depends.’
Technical analysis works better in the short term, where trading market forces prevail over fundamentals, but in the long run fundamentals are ruling.
Thus, it is advisable for long-term investors to focus on fundamental analysis tools, but to use technical analysis tools to find good timing before buying or selling a financial instrument in the short term, maximizing the overall profits.
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