Tempted by technical analysis?

Tempted by technical analysis? There’s a better way

The information in this article is market commentary only and reflects Lincoln's views and beliefs at the time of preparation, which are subject to change without notice. To obtain up-to-date information, please contact us.

It’s hard not to be enticed by the allure of technical analysis when it comes to driving your investment decisions as it’s a relatively quick and easy tool to apply. But for most investors, relying on technical analysis is like removing a screw with a hammer – you are just not going to get the best results.

This isn’t to say there aren’t people who have been successful in using technical analysis, which typically use share price and volume charts to identify patterns that would indicate if a company would make a good investment.

However, technical analysis is not the right investment strategy for those looking to steadily accumulate wealth over the longer-term and those who don’t have the time to keep looking at their trading screens due to work and family commitments.

Usefulness of technical analysis

Technical analysis only gives you half the story and is premised on four key assumptions:

  • The market discounts everything;
  • Price moves in trends;
  • Investor psychology manifests in charts; and
  • History repeats itself.

Technical analysis is about moving with the herd. When the price goes up, you buy; when the price falls, you sell. It’s all about making the trend your friend and is more suited to traders than investors.

Fundamental analysis vs. technical analysis

This leaves investors with only one other real tool they can use – fundamental analysis.

Fundamental analysis is a perfect strategy for investors looking to grow their wealth over the long term. Many successful investors such as Warren Buffet have championed the benefits of this method for decades.

Here at Lincoln, we conduct our own brand of fundamental analysis by using our unique Golden Rules methodology. We conduct this analysis on every business listed on the ASX200. By utilising this set of strict guidelines, we are able to separate the fundamentally strong businesses from the rest in the form of Star Stocks.

The three most important golden rules whereby we evaluate a business are:

  • The financial health of the business
  • The management and leadership qualities of a business
  • The businesses performance outlook and sustainability.

Many often wrongly feel that fundamental analysis, which involves assessing the underlying quality of a business to ascertain the investment opportunity, is harder to apply than technical analysis because it typically requires a strong grasp of economics, accounting, mathematics and business/industry knowledge.

We certainly won’t dispute that. It’s impossible for an investor to conduct thorough research on all companies listed on the share market!

This is why we created Stock Doctor to undertake all the essential work for investors as we apply fundamental analysis on all ASX listed companies.

Proven shortcut to fundamental analysis

To create an ‘easy-to-use and understand’ tool for company research, we have taken our software solution even further by identifying “Star Stocks” to help investors focus on the best growth and/or income opportunities on our share market.

What this means is that anyone can construct a portfolio of quality stocks within minutes and can be confident about their investment, because we’ve done all the hard but necessary.

This is important because the quality of a business is not always reflected in the short-term price movement of their stock. This means Stock Doctor can give you a powerful edge as you will know which stocks to buy when technical traders are selling them for reasons not linked to the fundamental health of the business.

History has shown that these opportunities often pay off handsomely over the medium term and beyond.

Using Stock Doctor will make investing and managing your portfolio easier than using technical analysis – and you won’t have to worry about going crossed eyed looking for intricate patterns on a chart!

Important: Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln). AFSL 237740. This blog may contain general financial product advice. It has been prepared without taking account of your personal circumstances (including your objectives, financial situation or needs) and you should therefore consider its appropriateness in light of your objectives, financial situation and needs, before acting on it. You should read and consider our Disclaimer for more Important Information and our Financial Services Guide (FSG) which sets out key information about the services we provide. The Disclaimer and FSG are available at www.lincolnindicators.com.au.

The Golden Rules White Paper