In the stock market, it’s important to know how you like to make money.
Most participants are investors who rely on fundamental analysis to choose the stocks they buy. Traders, however, don’t care about a company’s business. They just care if the stock is going up. And for that, many rely on something called technical analysis.
Take your two most common types of investors: value and growth. Value investors typically like cheap stocks, the cheaper the better. Growth investors like, well, fast growth. Both, however, look at a company’s fundamentals — its profits, sales, profit margins, market share — to reach a conclusion about whether to buy or sell.
Traders don’t care about what’s going on in any underlying business. They do care about what the stock chart looks like. So they use technical analysis to better understand all the information contained in the stock’s chart.
Make no mistake, there is a lot of information. Chart patterns can tell when investors are getting more or less bullish on a company. In fact, when correctly interpreted, a technical analyst can even provide clues about what’s going on with a company’s fundamentals.
Sometimes, just by looking at a chart, it’s possible to tell if a company is beating or missing earnings expectations, growing faster, or struggling against competitors.
Some liken technical analysis to sorcery or superstitions that have no basis in fact. In some ways, it is like a magic trick.
One that, like all magic tricks, takes a lot of practice.
I’ll tell you more about technical analysis — and how you can practice reading charts — in the video.
But first, a pop quiz:
Which of these technical analysis terms represents the price that a stock has a difficult time rising above: a) resistance, b) support or c) a death cross?
For the answer and more, watch this video.