Trading Stock Market
Both of these approaches may make you money if you apply them correctly, based on the anecdotal evidence from individual investors or traders that have used these strategies successfully. For example, fundamental analysis, which relies on fundamental information about the companies and the economic climate to make trading decisions, has been successfully used by, for example, Warren Buffet, currently the second richest man in the world. His trading philosophy relies on the financial fundamentals provided by the companies to their investors, found on the profit and loss statement and balance sheet. The fundamental analysis often tries to convey whether a company or a sector or the stock market in general is undervalued to its fundamentals. Technical trading, in contrast, relies only on the past price information of the stock or market in question. The philosophy relies heavily on the efficient market hypothesis, which says that all available information is already discounted to the current stock price, which means one cannot find undervalued stocks based on fundamental analysis. Instead, technical analysis tries to find patterns that repeat themselves over time, and initiate trades to profit from these expected moves. Some of the strategies are mathematical in nature, and rely on the stock price crossing some mathematical boundary that works as a buy or sell signal, such as a historical moving average. These strategies have been used very successfully by traders over the history of the stock market, with such names as Richard Dennis, Paul Tudor Jones, and Louis Bacon Moore. Many very successful traders take parts of both fundamental trading and technical analysis to their approach. These traders include Jim Rogers, who is the name best known to be associated with commodities trading and Quantum fund, which he founded together with George Soros. The downside of both these generic approaches to trading on the stock market is that they don't specify the amounts or capital risked in any of the trades, or whether an investor should further invest into the stock after the initial trade has been put into place, once the stock price moves in a direction. There is a separate investors tool that takes into account the needs to control the risks and downside risks of using a systematic approach to trading. This tool is called money management, and there are several ways in which it can be used, but all aim to provide an amount of risk control so that the 'risk of ruin' from trading is minimized. |