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Risks and rewards: TA and FA.

Saturday, January 9, 2010

In an article in Investor's Business Daily on 7 Jan 09, Alan R. Elliot wrote:

"One of the most common mistakes among investors young and old: never bothering to learn to read charts. Yet the price and volume action shown on charts is a critical tool."

The long and short of TA is to determine resistance and supports as the basic idea is that we should sell at resistance and buy at supports. This is in conjunction with trend analysis. For example, if the trend is up, everytime the price falls to support, generally, it's good to accumulate.

Then, we want to look out for chart patterns which might hint of trend continuation or a trend reversal. In TA, it is always important to seek confirmation in the following session after a signal, either bearish or bullish, manifests itself.

I know of people who have paid thousands of dollars to take up courses in TA and I can't possibly do justice to the subject here with a short post. Investopedia is a very good free online resource and I've provided a link in a box labelled "RESOURCES" here in my blog.

In the same article, Alan went on further to say that "other investors suffer from the opposite weakness: not knowing how to analyze fundamentals. That is, they don't know what to make of sales, earnings, margins and other financial data. So, if there are areas of financial reporting you haven't gotten your arms around, make 2010 the year you master them."

If a person bought some stock without any knowledge of fundamental analysis (FA), he could make some money depending on TA as he trades the psychology of the market.

If a person has no knowledge of TA, he could also make some money gunning for undervalued stocks.

If a person has no knowledge of either, he is going in with 100% risk. If a person has knowledge of both TA and FA, his risk is not 0% but it is much reduced.

What about depending on professional analysts, you may ask? My answer is to do your own research. This gives you confidence in your decision and allows you to hold with conviction.

If an analyst says "BUY", use that as a starting point and go look through past financial reports and announcements made by the company. Compare with peers in the same sector. Look at the macroeconomic and geopolitical conditions. Consider financial or any other trends which might have an impact.

Then, decide if the company is fundamentally sound and if the prospects are good. If you have a green light, use TA to determine a fair entry point. I must have mentioned this a few times before and it sounds really quite simple. Of course, it's not. It entails some hard work.

So, if you have yet to learn FA and/or TA, it's time to hit the books. You will find it all worthwhile.

Related posts:
1. Rich Dad, Poor Dad: 2 are better than 1.
2. Recommended books for FA and TA.
3. 5 rules for successful stock investing.
4. Secrets of Millionaire Investors.
5. Little Book of Value Investing.


Createwealth8888 said...

Did you attend any of the trading courses conducted by our local Trading gurus?

AK71 said...

I'm self taught. Lots of good books in the bookshops and lots of free resources online. I also enjoy getting weekly updates and ideas from The EDGE.

I learned a lot from the school of hard knocks. Mr. Market is an unfeeling and effective teacher. He doesn't spare the rotan! :(

Createwealth8888 said...

Well done. Success will be yours!

AK71 said...

Thank you for the kind words and well wishes. I know I still have much to learn. Let's all learn and make money together through our investments in the stock market. :)

Anonymous said...

Hi Ak,

You recommened TA for dummies by B.Rockefella. Is it really easy to understand and can be applied upon? How much did you pay incl. shipping charges from Amazon? I checked with another online bookstore in UK and they are selling $22.11(delivery is free worldwide).Which is cheapr? Sorry to ask you such trivial question.
Tks for the advice always.

AK71 said...

Hi Sa,

Yes, both the TA books I recommended in the Dummies series are really easy to understand. You can definitely put what you've read into practice. :)

I only started this blog last Christmas Eve. So, I did not buy the books from Amazon. I paid full retail prices in the bookstores here: MPH and Page One. :-(

A friend bought some books from Amazon and the nice thing is that he bought the used books which are practically new at about half the usual retail prices. He said the cost of shipping is cheaper per book when he buys a few books instead of just one book.

Click on the Amazon widget above and see if they have used books for the ones I recommended and see how much it costs to ship to you. If it costs more than what you have found, forget it. :)

AK71 said...


You talked about TA a lot last evening but if I do not want to be a trader, is it relevant to me? I only want to be an investor.

I feel that TA can be useful to investors too.


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