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When analyzing financial instruments, there are usually two schools of thought. The more traditional approach is to focus on a company's fundamentals. One can study the earnings growth potential, price/earnings ratio compared to peers, or more precisely, the company's annual report figures. All this attempts to assist the investor in forecasting the future price behavior of the company's stock. In broader markets such as foreign exchange rates and interest rates, it would be the economic performances of the country versus another, or where the country is at in terms of the economic cycle that would be focused upon.
Moreover, due to rapid proliferation of information technology, such type of information are not only readily available, but in fact so much so that the amount of information can overwhelm any individual's attempt to make a meaningful study without undue time delay because of the sheer volume of work involved, thus rendering the derived results often useless.
In the other spectrum, however, lies the development of collective investment schemes such as funds that employ asset managers and their specialized analysts, whose main focus is to concentrate their efforts in one or two selected industry sectors or companies. For any individual trying to compete with these analysts and be one step ahead, it would be extremely difficult.
Even assuming that we are sufficiently competent in our ability to analyze information, it still does not stop the likes of Enron to doctor their results and therefore finding genuine fundamental information is itself already a great hurdle to overcome.
Perhaps the most important aspect of all is the fact that all the study and work involved would only end in a decision to buy, hold or sell, effectively translating the work into the price behavior of the instrument. How much the market has discounted the information, how much expectation is build into the price, and how would sentiments change when a new set of figures come out are all things that can not be effectively studied based on the underlying fundamental data. Thus, this is where we can turn our attention to the second school of thought when analyzing financial instruments: Technical Analysis.
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