Recently I was speaking to a friend who just got started in the stock market and he told me that he wants to trade penny stocks. It aroused me to think why start with so much risk, after all, don’t we want to start slow? I thought it was make for an interesting read to anyone who is considering between investing and trading, and hopefully help them to decide which they want to pursue. Having been in the market since 18, I started from a very strong Technical Analysis background and have shifted my focus towards Fundamental Analysis. I write this post to share my personal opinion and experience so that you may benefit from it if you’re at the crossroad between investing and trading. I’ll structure this article into two sections, speaking from a Technical Analysis POV then a Fundamentally POV, before sharing with you my thoughts after having been schooled through both sides.
School of Technical Analysis (TA)
- Fun, Exciting and Visually Appealing
- Easy To Spot Opportunities
- Quick Feedback For Learning
Fun, Exciting and Visually Appealing
TA is fun, exciting, visually appealing and makes you feel smart when your backtests and predictions work well. I know how it feels! You feel like you’re able to spot the next move that is coming based on technical indicators.. MACD, Stochastics, Bollinger Band, RSI, etc. Or the chart patterns.. Head and Shoulders, Dead Cat Bounce, Ascending Triangle, Bull Flag, etc. They are endless and ever so exciting! I used to scan through the entire SGX by clicking one stock at a time on my charting software, Chartnexus, every single week without fail! And I enjoyed that process quite a fair bit because whatever I managed to filter out means potential profits.
There’s no need to fully understand what each of the indicator mean. As long as there’s some crossover of lines, or they appear in the oversold region, you can make a decision to buy/sell. As long as you are good at identifying, TA is very quick to pick up.
Easy To Spot Opportunities
It’s easy to spot entry opportunities using TA. There’s no need to understand the company, no need to read annual reports. Everything is simply presented to you in a visual format. I could finish scouting the entire SGX for opportunities for the week in less than 2 hours and it made me feel really good that I was able to spot a lot of moves before they happened.
Quick Feedback For Learning
One of the best things about TA is that it provides you a very quick feedback. You’ll learn very fast which indicators work well and which is “more accurate” because everyday or even every minute (depending on your time horizon) you’ll be updated of the progress. Also as trades tend to be more short-term in nature, you’ll very quickly learn if how you are analysing is the correct way or not. If by the time the same indicator says ‘Sell’, and you didn’t profit, you know you might have went wrong somewhere.
School of Fundamental Analysis (FA)
- Sound Understanding
- More Conviction
- Independent Mind
One thing I like about FA is that as I spend time to understand a company, I know exactly what I am getting myself into. I will understand why price moves in a certain way, and if that move is a temporal one or one that is justified. Once we start to look at stocks from a business perspective, we can start using ‘common sense’ (Apparently not so common as well) to judge if the business is sustainable and get a sense of where the share price generally will be.
Even when the share price falls, FA gives me the conviction to hold if it is truly a good business. Not only hold, but possibly buy even more at a cheaper price! Students of TA cannot do that because they will be taught to ‘cut loss’ based on price-action even if it was just temporarily oversold, in spite of the fundamentals of the company remaining intact.
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” – Ben Graham
It’s fun to play by the voting machine until you find yourself on the losing streak, constantly cutting losses. It really hurts your confidence not just in the market, but in yourself as well.
One thing I cherish a lot is the independence of my mind. I don’t like to be swayed by the opinions of others and I can do this by employing FA. Because it’s more tedious to dig for information, you’ll get lesser opinions about your stand as well. (Because people are lazy) The good thing is, there’s a higher chance that only the more experienced people will post their opinions, justified by facts, so you’re more likely to benefit from their opinions as well. If it were easy, even an amateur could post their opinion of a chart and immediately swing you off your stance to buy or sell.
“You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right—and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.”
Tried both, which do I prefer?
I cannot deny that it was easier to put a feet in the market when I was 18 using TA because it was really easy to learn. Perhaps I shouldn’t even use the word ‘learn’, but rather, ‘identify’. As long as I did a good job at identifying, I was able to profit from it. For at least 2 years, I was performing Technical Analysis on an almost daily basis and my interest in the stock market grew tremendously. It wasn’t that I wasn’t well-versed with my FA, just that it was too much of a hassle when I knew of an easier and profitable way.
However, all of that changed when one day, my stock plunged 90% at the opening bell. That was a really defining day for me. Till today, its price never recovered. I don’t think many people would have experienced that because there wasn’t the circuit breaker back then. As a student, it was traumatic to lose a few thousand in a matter of seconds. I never learned what went wrong with my TA and couldn’t apply any cut loss methods (eg. 10% cut loss) since it gapped down. And till today, I carry the pain with me, constantly reminding myself to understand the company that I am placing my money in. To never throw good money after bad stocks.
Over time, I begin to find appreciation for FA, although it was tedious (as all things are at the beginning), I slowly enjoyed the process. You’ll begin to take a very holistic view of the company you are investing in, find hidden gems, and find potential problems that hasn’t surfaced yet. I personally find it more fun now to spot something that everyone else hasn’t spotted, and also it’s very rewarding. No doubt if the goal is simply to buy and sell stocks just for capital appreciation, both method works. However, there are some things that TA cannot teach you, especially if you are interested in investing for dividends.
My take? Try both, but FA should always take precedence over TA. After all, even if it’s a good business, it doesn’t mean it’s a good investment if you’re overpaying for it.
Have you read: Start Seeing Your Opportunity Cost?