10.12 Technical analysis or fundamental analysis

Hanumant Dhokle

Whether to follow Technical analysis or Fundamental analysis

Fundamental analysis tries to estimate the intrinsic value of a security by evaluating the fundamental factors affecting the economy, industry and company. This is a tedious process and takes a rather long time to complete the process. Technical analysis studies the price and volume movements in the market and by carefully examining the pattern of these movements, the timing of the stock price is predicted. Since the whole process involves much less time and data analysis, compared to fundamental analysis, it facilitates timely decision. Fundamental analysis helps in identifying under-valued or over-valued securities. But technical analysis helps in identifying the best timing of an investment, i.e. the best time to buy or sell a security identified by fundamental analysis as under-valued or over-valued. Thus, technical analysis may be used as a supplement to fundamental analysis rather than as a substitute to it. The two approaches, however, differ in terms of their databases and tools of analysis.

Fundamental analysis and technical analysis are two alternative approaches to predicting stock price behavior. Neither of them is perfect nor complete by itself. Technical analysis has several limitations. It is not an accurate method of analysis. It is often difficult to identify the patterns underlying stock price movements. Moreover, it is not easy to interpret the meaning of patterns and their likely impact on future price movements.

Source of Information for Technical Analysis:

There are many sources which provide data free of cost. Some of them are websites like yahoo finance or rediff finance, stock brokers WebPages, business newspapers and business channels. These sources provide free market information and charts on a daily basis. So let’s make use of them to start our observation and analysis. In addition to these free sources, there are vendors like Reuters, Bloomberg and Telerate which would provide a comprehensive data base for technical analysis. But that is a costly affair.

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