Question: Should I use fundamental and technical analysis together?
Answer: The answer is a resounding "yes". Once you decide the shares you wish to buy, it is best that you take the help of technical analysis to time your trade. Not only will it tell you when to buy, it will also keep you in the trade for the period the trend is in your favour, it will give you profit taking and exit points. It is possible to use either discipline to trade without an issue at all, but, the risk is minimum when you use both disciplines.
FAQ on Fundamental Research & Analysis
Question: How can I do fundamental research?
Answer: The simplest answer is to keep your eyes open, and collect whatever information is possible about a company and its management from newspapers, television, magazines, internet websites and stock brokers. The best companies to look for are companies whose business you can understand easily, and whose products are available commonly.
Question: How should I use it?
Answer: Use the information to ask pertinent questions about the company, its business model, its management and growth prospects to other persons who you generally interact with like your chartered accountant, friends, stock broker and maybe, other investors. Use some of the products if possible and compare with competing products. Then draw your own conclusions about whether you would like to be a partner of that business.
Question: How can it help me?
Answer: It will help you avoid bad investments, and also give you the pleasure of earning much better returns that a normal debt instrument or FD.
Question: What are the pitfalls?
Answer: The major pitfall is that you may get carried away by the marketing done by companies about their prospects whenever they wish to raise money from the market; by fund houses who want to sell their mutual funds; by brokerage houses when they wish to manipulate the markets. The answer is, of course, to look past the hype and be realistic about which companies can give you good returns, if not the best. The easiest thing to do would be to stick to the blue chip companies with consistent track records.
FAQ on Technical Research & Analysis
Question: What is a technical chart and what is technical analysis?
Answer: A Technical Chart is like an Electrocardiogram (ECG) of any security. Like the ECG is a graphical representation of our heartbeat, the technical chart is the graphical photo of the trading in any security which has taken place in the market.
Unlike an ECG, the technical chart for the same share can be different depending on the length of the beat. We can measure the beat every 1 minute, 5 minutes, 10 minutes, 15 minutes, 30 minutes, 60 minutes, 1 day, 1 week or 1 month. Generally for investors, the beat measured once a day is the right beat.
Technical Analysis is the study of this "ECG".
The beauty of the technical chart is that it uses no assumptions. It is not dependant on anyone's mood, any news or even an event like 9/11. The raw material is the actual trading data released by the exchanges.
Question: How should I use it?
Answer: Unfortunately the study of technical charts requires training, and hence, you should not attempt to do so yourself. Consulting a professional is the best bet. Please do not attempt to take decisions based on technical recommendations as seen on popular television.
Question: How can it help me?
Answer: The technical chart should be used to identify the Entry, Trend, Profit-taking and Exit points.
Question: What are the pitfalls?
Answer: As the raw material is the actual trade data, if trading of any security can be manipulated on a regular basis, then the chart can be manipulated. Hence one should use the chart for shares which have high volumes, and in which any kind of regular manipulation is difficult.
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