Two captains of the same shipPrevious part of the post: My Three Comrades: the Chart, the Screener, and the Watchlist
Now let's move on to the fundamental analysis. Remember in this post I gave the example that a joint stock company can be thought of as a hotel, and owning shares can be thought of as owning one or more rooms in that hotel. So, imagine now that our hotel has a terrible foundation with lots of holes in it. What would happen to such a hotel? Of course, it could collapse, dragging everything down with it. It would also affect the value of the stock, and in our case, the value of the rooms. Because no one will want to buy rooms in such a hotel, on the contrary, they will try to sell them at any price, and then the value of rooms (stocks) will go down.
The purpose of fundamental analysis is to understand how financially stable and profitable the chosen company is. Sometimes they say that a company has a strong or weak foundation - a generalized conclusion based on analysis of its financial statements. So, our task will be to find stocks of companies with strong foundations.
Let's go to "Chart+" and select "Indicators" in the upper toolbar. A menu will open for you, where on the left we will select "Financials". Here we can select data from company reports: Balance Sheet, Income Statement and Cash Flow. They are issued quarterly and annually. Accordingly, you can select any indicator from the statements, such as revenue, select the period - quarter or year, and add it to the chart. In this way, you can study the dynamics of this indicator over time.
In addition to the reporting data, you can add so-called multipliers to the chart. They are placed in the same menu after the "Cash Flow" > subsection called "Statistics". What is a multiplier and how to analyze the statements, we will discuss in our separate posts on the fundamental analysis, and now let's move on to the technical analysis.
Technical analysis is a search for recurring patterns on a price chart in order to predict its future behavior.
Let's go back to the time when candlesticks were invented. These charts appealed to traders so much that they began to look for repeating combinations of candlesticks, which served as signals of future price movement.
For example, there is a combination called "bearish engulfing" . When the market has a clear upward trend, and in one day, a massive bearish candle appears, the body of which closes the body and shadows of the previous candle - it can herald the reversal of the uptrend.
Or, if the market for three days in a row is drawn three black candles with massive bodies - they are called "three crows" . Traders interpret this as a sign that the downtrend is continuing.
Doesn't that sound like an omen to you? In fact, people have made up dozens of similar patterns and many more that, like weather forecasts, don't always come true.
You must have sensed that I cover this topic rather cursorily? This is due to the fact that I do not use technical analysis at all. That is, I do not make predictions based on recurring situations from the past.
I do, however, use one of the tools of technical analysis, which is the average value of the stock price over the year. Not to make predictions, but to have a guideline: when to buy and when to sell stocks of companies with strong fundamentals.
I will surely elaborate on this in my next posts, but for now, wrapping up the topic of technical analysis, I want to give one analogy.
Stock price movements can be compared to the sea: sometimes it is calm and sometimes it is subject to strong waves. An investor can be compared to the captain of a ship who has to decide whether to put to sea now or not (i.e. whether to buy stocks or not).
A captain who looks at the official weather reports and gauges is like an investor who uses fundamental analysis. And a captain who is only guided by omens and his gut is like an investor making a decision based on technical analysis.
You can be captain number two without me, but how to become captain number one is the subject of my blog.
