There are only two ways to analyze an investment: fundamentally, or technically. Most analysts work strictly off the fundamentals of an investment. The following analogy will give you an idea about the difference between the fundamental and the technical analyses of an investment.

You may have heard the saying, “A rising tide raises all ships,” and this may be true if your all important ship didn’t have a gaping hole in the bottom of it. When your boat springs a leak it isn’t fundamentally sound and can easily sink beneath your feet. When your boat is sinking, it doesn’t matter if the tide is high or low. Sinking is sinking! In this case, the tide is like technical analysis. If you watch the tide closely with some accuracy, all the while paying attention to all the factors that influence the tide, you may start getting an idea about when the tide will rise, and when the tide will fall. On the other hand, fundamentals measure things using a black and white scale. How many products does a company make? How many customers does the company have? What is the company’s price to earnings ratio? At what rate are the company’s earnings growing?

Technical analysis measures things using the rate of the change of price, support and resistance levels, and moving averages to name just a few. What does this mean? Well, as I mentioned earlier, the market and sectors determine 80% of what is going to happen to every investment in the market. Sadly, your investment can have the greatest fundamentals on the planet, but if the market turns tail and runs; your investment is going to retreat with it. It isn’t any fun trying to chase down a retreating investment! Technical analysis tries to keep a measure of the mood of the market. If the market is in a good mood, the chances of your making some money are good. When the market is in a foul mood, you should probably curl into a ball and leave it alone!

Personally, I believe that the market is always right. Sure, I disagree with it sometimes, I wouldn’t be human if I didn’t, but I have learned not to argue with it. If the market wants to be in a foul mood, let it. You can't stop it. However, you can sit along the wall and wait patiently, all the while conserving your capital and waiting for the market to get in a good mood again.