Having read a few articles that I have contributed solely on Technical Analysis, most of my readers who are new to investments might be feeling a little 'high on the horse'.
Halt! Read at least THIS Discussion before executing your big time plan!
Just hours ago (as I'm writing this article), my mentor and I attended a Market Chat organized by Hong Leong Investment Bank. There, I bumped into one of my old friends, who was also an ex-student of my mentor. I found out that she has been visiting my blog recently and is very interested and geared to start managing her own investments portfolio.
"I can't read figures, and I don't like reading figures. I like graphics. I like pictorial diagrams. Technical approach breathes new life into my dreams of getting rich."
After the course of Market Chat, we met again at the lift. She excitedly said this to me,
"I couldn't understand a thing of what the speaker said just now. It was too technical for me. I don't care of the market outlook or if the economy crashes. I don't know what GDP, MGS or QE are. The most important session of the evening is at the last moment when he shared with us the list of recommended shares that will outperform the market this year. But as you said, I will go back and read the charts first before doing anything."
I then asked her to read my next article (which is this Discussion) this weekend before reading the charts.
As I have mentioned in Discussion 2, a Sophisticated Investor (SI) would use a combination of both Fundamental Analysis (FA) and Technical Analysis (TA) in determining whether to confirm or dispel an investment decision. I don't recall asking my readers to neglect FA!
Every investment has to make sense. I am using this strong word here - sense. 'Making sense' is a phrase that I have shunned using for months after gotten into an ugly conflict with my superior in my previous employment. While I don't know why many people find it offensive with this phrase, I understand that many people don't like hearing it. Well, reality sounds harshest when it is closest to the truth. The 'making sense' part in investments refers to FA.
FINANCIAL FUNDAMENTAL
For investors, the Financial Fundamental of the stock's underlying company must be strong.
Imagine your target company's debt equity ratio is 200% (debts twice the equities) and is having millions of negative cashflow from Operating Activities (OA). In addition to that, you realized that the company is underperforming industrial average by at least 20% for 3 years in a row! Key management personnel are changing almost on a bi-annual basis.
I can't sleep at night if I ever invested into this stock. This investment just doesn't makes sense. Ask yourself, "Who would've wanted this stock?" This means that there is a high probability that the charts are only showing False Signals.
Most of the time, if I were to go long for a long period of time with a stock, I would shortlist to monitor a few companies with good OA cashflow and had a good equilibrium on capital management policies - an optimization of debt and equity. They must also be healthy on other useful financial statistics such as ROE, profit margin, and dividends policy.
MACROECONOMIC - FISCAL AND MONETARY POLICIES
Investors/traders should also know at least the basic of macroeconomic and how it plays an influence on the stock market as a whole. You need not to be as skillful an economist, but the foundation studies must be there so that 'you know what you are doing'.
Let's say your target company is operating in the Automobile industry (Cyclical Consumer Products). If the economy is currently experiencing high inflation and high interest rates, will you be investing into this company, even when the chart shows that there is a good setup? I will never do that.
In times of rising interest rates, many consumers will restrict spending. Borrowing costs would be high. Purchasing power is low. Cars would then be more expensive. Will they even consider buying a car right now?
At this moment, unless there are other good reasons supporting the chart readings, I would fire aggressive stocks from my hitlist!
On the other hand, I would be more interested in defensive sectors such as those in Food, Healthcare, and Cosmetics (Non Cyclical Consumer Products). Cosmetics remain to be my favourite bet in an early bear :-). Think, no matter how bad the stock market is, ladies will never stop making up! :p
I might even consider to invest in bonds at this time. This is an excellent time to find a good bargain for fixed income securities. Bond prices are negatively correlated with interest rates. If interest rates are expected to drop in the future, bond prices will increase to maintain its attractiveness against other investment vehicles, such as stocks.
FLUCTUATIONS IN OTHER FINANCIAL MARKETS
To name two of the most important ones:
Commodities Market
If oil prices were to increase, I would be wary prior to investing in companies operating in Transportation. Investors/trading would have to research and see if the target companies have sufficient and reliable oil hedging policies in place. Jumping to invest/trade in one that has none, basing solely on the chart, doesn't make any economic sense at all.
Oil and Gas companies tend to make good progresses during these times. So, is it making more sense to invest/trade in these companies while oil prices increase?
Futures Market
For day traders, or swing traders, futures market is an important component to trading success. Futures market pre-empts the behaviour of stock market and acts as a good indicator to what your trading strategy would be, at least, in the early hours of the market. It makes no sense to start long in the stock market when the futures market shows declining figures!
Also, as the day progresses, the stock market would then most likely guide the direction of futures market. So, if the stock market progresses as a big bull, shorting in the futures market would seem similar to digging a hole, jumping into it, and then covering yourself up. There is no meaning for that person to stay alive after making such decisions. >.<
Investors/traders should also keep abreast of other financial and non financial information available on the media to base their decisions on. Every morning, prior to commencing my trading day, I would sit down with a cup of black coffee and scan through news via theedgemalaysia.com and thestar.com.my.
Other than that, I will also login to my trading platforms to scan through available investment and business news. I will also look into the futures index (FKLI), if I intend to trade on the 30 counters forming the KLCI index. If the futures market doesn't show a positive sentiment, I might even consider beginning my day by shorting the futures.
Knowing FA to pair with the deadly tools you learn in TA would further enhance your investment/trading profitabilities, even if your investment horizon is extremely short, such as intra-day trading. As a day, as well as swing trader, I always find FA very useful in helping me to determine a sensible tolerant level for stop losses.
Depending on your investment/trading preferences, your main approach could be either FA or TA, but in either approach, you must also incorporate a sufficient degree of the other school of thought. Never isolate the other!
Always make your investments/tradings as sensible as possible. Don't invest/trade in anything that doesn't make sense to you. As what Robert Kiyosaki always says in his books (unless you are shorting the futures),
"You make your profits when you buy, not when you sell!"
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