Technical analysis of stocks involves using charts and other indicators to predict a stock’s future performance. At its most basic level, a stock that is rising, as evidenced by drawing a trendline underneath the lows the stock has made, will tend to continue moving in that direction, until the trend is broken. In theory, technical analysis should work for both large and small cap stocks.
The counter argument is that it is a real challenge to use, as the primary indicator, technical analysis to play speculative stocks. Fundamental analysis of not just the sector but the company is often required. Thus technical analysis is more valid with larger companies as they would have greater analyst and institutional interest and for these entities it takes time to accumulate positions, which often drives up prices methodically.
Fundamental analysis is important, you can use technical analysis on smaller companies; you can use technical analysis on anything. For example, try plotting the price of gas at the pumps, or the temperature for the last hundred years. You will see trends, and technical analysis can be used to help predict these future trends.
So the answer is that technical analysis can be used on both large and small cap stocks, but it is also true that two other factors should also be considered when deciding what stocks are worthy of investment.
Obviously fundamental analysis is required. Fundamental analysis involves examining the company, and the company’s industry, to determine if the investment makes sense. A chart of a horse-show manufacturer going back 200 years might look great, but fundamentally there are very few people who buy horse shoes any more (we drive cars now), so it may not be a great investment.
Finally, the perceptions of the world should also be considered. The perfect time to invest in television manufacturers was when everyone was saying that TV would not replace the radio. The ideal time to invest in internet companies was in 1995 before the world took notice. Investing in internet companies in the year 2000 was the exact wrong time to invest; it was too late, because the world had already discovered it at that time.
We conclude that using technical analysis, fundamental analysis, and common sense will lead to successful investment decisions. For more information on technical analysis you can consult with Paradigm Capital Management a Small Cap Company.
Paradigm Capital Management has the experts when it comes to Small Cap Investment and we can definitely assist you with your financial goal, contact us at (518) 431-3500
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