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Required Background for Learning Technical Analysis

Oct 21, 2009

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This chapter is from the book 

Technical Analysis Plain and Simple: Charting the Markets in Your Language, 3rd Edition

Learn More Buy

For Fundamentalists

"The biggest mistake that a fundamental analyst makes is thinking that a stock and a company are the same thing. The biggest mistake a technician makes is thinking that a stock and a company are different."
—Phil Roth, chief technical market analyst, Miller Tabak & Co. LLC

Even the most ardent believer in fundamental analysis could benefit from technical analysis. Technical analysis helps to time purchases and sales of securities. When a company receives glowing fundamental reports, its stock may not be good to buy. It may have already run up on the news or anticipation of the news. It may have been caught in a frenzy of activity that was unrelated to the fundamentals. Internet stocks in 1998 were a good example of this.

Technical analysis helps to determine if the price of the stock has moved to an extreme. Price in the market can and does become decoupled from the fundamentals.

Even a fundamental analyst in technical denial uses some technical information, such as 52-week price range and earnings history. The former represents a crude measure of past performance. The latter is actually the trend in earnings.

To recap, this book is not about getting you to abandon your fundamentals. It is about enhancing your analysis with charts. This author is a full-fledged technician, but you do not have to be.

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