Stock TA stands for Stock Technical Analysis, an important concept for serious and savvy investors. Generally speaking, investment strategies tend to fall into one of two categories, fundamental and technical analysis.
Fundamental analysis focuses on the individual characteristics of a company. Technical analysis on the other hand, doesn’t concern itself with any internal information regarding a company. Instead, it focuses on price and market movements.
Proponents of each camp will claim that their method is superior. However, at the end of the day it largely depends on the investor him or herself and what s/he is most comfortable with. Still, many people prefer technical analysis. This is because there is no need to study individual companies themselves, but instead the market itself.
Understanding Fundamental Analysis
With fundamental analysis, investors try to determine the “real” value of a company. While a company’s market capitalization reflects the current price in terms of the total value of stocks, this does not necessarily reflect the true value of a company.
People who use fundamental analysis examine things such as leadership capabilities, product line ups, financial statements, and other pieces of information that allow someone to see “inside” of the company. This means that analysts must be able to process huge amounts of information and be able to connect a lot of dots.
For long term investing, having at least some component of fundamental analysis in your overall investing strategy would be wise. Understanding the fundamental nature of a company often helps an investor determine the long term trajectory of the company.
Understanding Technical Analysis
Analysts who use technical analysis are essentially concerned only with price movements in a given asset. If you’ve studied “stock TA” a bit, you’ve probably noticed that some investors are using huge algorithms, advanced computing tools, and lots of MIT or Harvard granted education to try to figure out what way markets will move.
While many technical analysts, or as they are sometimes called “chartists”, do indeed use a lot of advanced tools and education, these are not prerequisites. Despite all of the fancy terminology and tools, stock TA primarily focuses on supply and demand within markets, something anyone can understand with effort.
If you think back to your basic high school economics class (or any other economics class), you’ll probably remember that as prices drop, demand tends to rise. If prices increase, demand usually decreases. The reverse can also be said to be true. Rising demand often pushes prices higher, while dropping demand pushes prices lower.
Chartists try to predict which way prices will go based on supply and demand. For example, if a company suddenly suffers a three percent drop in price, there is a good chance that demand for that company’s stocks will suddenly increase, which in turn would push prices up.
If you examine a stock chart, you’ll notice that the rise and fall of prices is often jagged. Over the course of a trading day stock prices move up and down, and very rarely move in a straight line in one direction or another. Often, these up and down movements are due less to breaking headlines, and more to the sentiments of traders. Chartists try to figure out the ups and downs of the price over a short period of time.
Can Stock TA and Fundamental Existence Co-Exist?
We hope this helps you understand stock TA and what it means for investors. Technical analysis and fundamental analysis are essentially polar opposites. However, many investors in fact combine both strategies to create hybrid investing strategies. When done right, such an investment strategy can combine the best of both worlds.
If you are looking to invest in stocks, you should consider using both technical and fundamental analysis. Over time, you may find that one method is producing better results for you. At that point you could choose to focus your efforts on that particular strategy. Or, you might choose to use both methods. The trick is figuring out what works best for you!