"The richest one percent of this country owns half our country's wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It's bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you're not naive enough to think we're living in a democracy, are you buddy? It's the free market. And you're a part of it. You've got that killer instinct. Stick around pal, I've still got a lot to teach you." (Gordon Gekko, Wall Street).
Ignoring Scalping for now, there are 2 distinct investment philosophies that have dominated investment literature in recent years:
High-frequency trading is arguably becoming a 3rd category in this investment philosophy debate, however in this section we'll focus on the more establised fundamental analysis and technical analysis.
Fundamental analysis
The Wiki definition of fundamental analysis is as follows:
Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and management. When analyzing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis. The term is used to distinguish such analysis from other types of investment analysis, such as quantitative analysis and technical analysis. Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts.
But what does this mean to you as an investor? As per the definition above, fundamental analysis is used by investors to determine investment opportunies. As an investor, you will take a view on the underlying value of an investment versus the market view, and make subsequent investment decisions. Aside from the difficulty in producing an accurate underlying valuation, fundamental analysis does suffer from one major problem as an investment strategy: irrationality. There is a famous quote: "the markets can stay irrational, longer than you can stay solvent". The point here is that, you may produce a brilliant and accurate valuation of an underlying product, however if the market's view is different, and remains different, then, unless you are physically buying (or selling) a whole company, the investment opportunity may never be profitable. Nonetheless, fundamental analysis performs the basis of some of the great investors or our generation, such
Useful Fundamental analysis resources include:
- Basic Theory by Investopedia
- Introduction to Forex fundamental analysis
- Understanding the implications of the news on trading Forex fundamentally
- 6 numbers investors should know
- 10 signs a company is in trouble
- How to find a cheap technology share
- 3 ways averages fool investors
Technical analysis
The Wiki definition of Technical analysis is as follows:
In finance, technical analysis is security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis build on and incorporate many of the same tools of technical analysis, which, being an aspect of active management, stands in contradiction to much of modern portfolio theory. The efficacy of both technical and fundamental analysis is disputed by efficient-market hypothesis which states that stock market prices are essentially unpredictable.
Technical analysis is considered by some as a self-fulfilling prophecy, as if enough people trading belief that a subsequent movement is about to take place, the trading activity will behave in the required way for that movement to take place. However, from an investment portfolio profitability perspective, this outcome is not an issue, and as such, it is a highly popular trading technique.
Useful video resources include:
- Introduction to technical analysis
- Introduction to charting
- Introduction to technical indicators
- Introduction to Fibonacci analysis
