If we were all logical and could separate our emotions from our investment decisions, then fundamental analysis, the determination of price based on future earnings, would work magnificently. And since we would all have the same completely logical expectations, prices would change only when quarterly reports or relevant news was released. Investors would seek “overlooked” fundamental data in an effort to find undervalued securities.
The hotly debated “efficient market theory” states that the security prices represent everything that is known about the security at a given momentum. This theory concludes that it is impossible to forecast prices, since prices already reflect everything that is correctly known about the security.
THE FUTURE CAN BE FOUND IN THE PAST
If prices are based on investor expectations, then knowing what a security/currency should sell for (i.e. fundamental analysis) becomes less important than knowing what other investors expect to sell for. That’s not to say that knowing what a security/currency sell for isn’t important—it is. But there is usually a fairly strong consensus of a stock’s/currency future earnings that the average investor cannot disprove.
Technical analysis is the process of analyzing a security/currency’s historical prices in an effort to determine probable future prices. This is done by comparing current price action (i.e. current expectations) with comparable historical price action to predict a reasonable outcome. The devout technician might define this process as the fact that history repeats itself, while others would suffice to say that we should learn from the past.
No comments:
Post a Comment