Investors often fall into one of two categories: fundamentalists or technical analysts.
Fundamentalists rely on company fundamentals, like earnings, debt and price-to-earnings ratio. This information is typically released in a company’s quarterly or annual statements and helps an investor answer this question: Should I invest in this company?
Technical analysts, on the other hand, rely on chart patterns to determine the proper time to enter and exit a trade. This helps answer two of the biggest questions investors have:
- When should I enter a position?
- When should I exit a position?
After more than three decades in the market, I’ve come to learn a secret… Fundamentals and technicals shouldn’t be so polarizing – both have a place in successful investing.
After all, it’s not enough to know whether you should buy a company… You also need to know when to buy and when to sell.
And depending on your time horizon and investing goals, you may want to lean more heavily on fundamentals than technicals – or vice versa.
In my monthly newsletter, The Oxford Income Letter, I lean heavily on fundamental analysis. I look at metrics like income and cash flow to determine a company’s ability to maintain its dividend, and I study the competitive environment to gauge stocks’ likelihood of rising.
This is often the best way to look at a stock’s viability for the medium term to long term – and it’s a skill I honed while working at the contrarian firm Avalon Research Group.
But when I started my career as an assistant on a trading desk, executing trades and watching the “tape” for trends, I needed to find a way to help make sense of all the data flying across my screen. Thus, I began to rely on technical analysis and chart patterns.
These days, I can’t imagine making a trade without them. Using chart patterns is the perfect strategy for anticipating a stock’s short-term movements.
A few of my favorite patterns include…
- The bull flag pattern
- The head and shoulders pattern
- Ascending channels.
But what most people don’t realize is that there are inverses of these patterns that allow you to take advantage of downturns in share prices too:
- The bear flag pattern
- The inverse head and shoulders pattern
- Descending channels.
And if you can master just a few simple chart patterns – and their inverses – you can produce results that are unthinkable for most investors.