Technical vs. Fundamental Analysis

In the beginning investors bought portions of companies through stocks by weighing the strength and profitability of that company. They would then buy these stocks and hold them for long periods of time. Sometimes through their life. Of course in the beginning there were much fewer companies to choose from and fewer investors to invest in them. It was a good strategy.

At some point investors started to realize that the past performance of the markets repeated itself. As more investors became involved, the movement of the stocks started to take on meaning. The charts that followed the stock market began to be used to make buy and sell decisions. To many back in the day this was just so much voodoo. Predicting future market movements based on past behavior was considered irrational by many.

The argument for technical analysis is that investors will follow other investors. This philosophy was best explained in Charles Mackay famous book of 1941, Extraordinary Popular Delusions and the Madness of Crowds. Mr. Mackay wrote about the crazes that have gripped the public in the past such as the Dutch tulip craze and the South Seas bubble in which prices and /or stock was driven up dramatically as everyone wanted on board the newest trend. Once the public figures out what is happening, over valuation, everyone tries to get out at the sane time.

By watching stock charts and prices investors can predict when the public's demeanor is going to change based on past movements.

Many Investors use a mix of fundamental and technical analysis. By finding good companies with strong earnings and long term sustainability investors can get in and out using technicals. Now even some of the best companies can lose value based on traders sentiments to the charts. In turn there are companies that are not valued highly that can do very well on any given day. It's all in the charts.

Technical analysis is becoming more popular every day. In stressful economic times when the stock market is very volatile technical analysis becomes most useful and exclusive.