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The Benefit of Using Technical and Fundamental Analysis in Stock Trading

In: Business and Management

Submitted By kvjy
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ABSTRACT

The research question of this study is whether the weighted moving average as a technical method and simple trading plan as a fundamental approach can help Indonesian trader and/or investor in gaining consistent profit. The finding of this study will be useful to all the traders because it will show whether the usage of both fundamental and technical analysis will give better result than just using one of them as an analysis method. Upon answering the research question, researchers went through a deductive cross-sectional study by surveying companies in the Indonesia stock exchange to explain the effect of using both technical and fundamental analysis to analyze the price fluctuation of stocks. The data collection method is quantitative data collection by taking the sample of 5 companies from 5 different sector industries and then analyze the data gathered using the proposed analyzing technique: technical and fundamental analysis method.

Keywords : Technical analysis, Fundamental analysis, Stock price

I. Introduction

Like any other countries around the world, Indonesia has a financial market that consists of several investment choices available for public, such as: Stocks, Bonds, Foreign Exchange, Futures, etc. Those investment choices have different level of liquidity, risk and return profile. Stocks are one of the basic types of investment based on the corporate venture. Moreover stocks are popular for Indonesian investors and traders because it gives more return compared to bank savings or corporate bonds. There are two ways to analyze the price movement of stocks in a certain amount of time which more known as technical and fundamental analysis. There are some traders who are just using one of them in trading the stocks, and some using both of them. In his book, Stock Investing Wisdom, Desmond Wira (2012) explained that fundamental analysis can help investor or trader to find the best fundamental stock for long term or short term investment while technical analysis can help investor or trader to know when to buy or sell the stock at the right time which then will result in better trading performance. In this research, researchers going to use both techniques in order to analyze the price fluctuations of certain stocks in the Indonesia financial market to prove this hypothesis.

The research question is whether the weighted moving average as a technical method and simple trading plan as a fundamental approach can help Indonesian trader and/or investor in gaining consistent profit. The objective of the research is to explain why and how weighted moving average and simple trading plan can help Indonesian trader or investor in gaining consistent profit.

II. Literature Review
1. Stock Exchange in Indonesian Financial Market
In the book, Profit from the Panic (2011), Khoo, Lim and Huang explained that compared to other instruments such as Foreign exchanges and futures, amateurs will prefer to trade in stocks because in the long term stocks have the nature to go up instead of falling down and predictable, while foreign exchanges and futures are too volatile and somehow hard to predict.
1.1 The Reason Company Go Public
From his article “4 Reasons companies go public”, Tom Taulli (2012) mentioned at least 4 reasons behind a company go public. The first reason is to gain more access to capital (cash). Public company can get capital by offering their stock to investors and gain capital around five billion rupiah to ten trillion rupiah. Public company also gains more credibility by going public because it means that the company financial statements meet rigorous federal regulations. Also going public will help company to gain prestige as it shows the stability of that company, not to mention, it grants bigger and wider publicity and visibility to the market and investors. All of these three are beneficial in marketing a company. It could also help to determine the currency of stocks and shares in one company. In the case of private company, there is no certain formula to measure the value of the stocks and shares. Public Offering also grand more liquidity to their stocks, which will favors investors in term of providing the option to an exit strategy, portfolio diversity and flexibility of asset allocation. As for internal purposes, companies often use stock and stock options to attract and retain potential and talented employees.
1.2 How Private Company Go Public through IPO
There are at least four phases for a company to go public in Indonesia (Daniri, 2008). The first one is the preparation phase. In this phase, the company will first hold a General Meeting of Shareholders (GMS) to gain the approval of the shareholders. After gaining the approval of the shareholders, next the company will then decide the underwriter and other capital market institution or profession such as public accountant, law consultant, and notary.
The next step is then filing a registration statement. In this phase the company should file the registration form along with supporting documents such as audited financial statements to the Indonesian SEC known as Bapepam. The company can only proceed if the SEC gives a statement to acknowledge the effectiveness of the registration statement. Then they can proceed with the Initial Public Offering. After completing the IPO the company will then be listed in Indonesia Stock Exchange (IDX).
2. Fundamental Analysis of Stocks Trends
Fundamental analysis take into account of many factors include performancde of the company ,analysis of competition in the same industry, and macro and micro market analysis. The healthy of the company can been seen through fundamental analysis. Stock valuation method is one of the fundamental analysis to know company stock intrinsic value.
Desmond Wira (2011) state that fundamental analysis can help investor to make certain decision in four aspect. Firstly, Desmond (2011) estimates that by doing macroeconomic analysis in Indonesia , investor can determine whether Indonesia economy is growing or declining. Investor can invest their money in Indonesia stock exchange when Indonesia economy is growing and when Indonesia economy is declining, it is better to stay away from the market. Secondly, Desmond (2011) state that fundamental analysis can help investor to choose the best stock in IDX for investment. There are around four hundred stock that can be bought in IDX and there are new private company that go public (IPO) every year. Therefore investor need to select company or stock that has good fundamental. Industry sector analysis and analysis of micro – enterprises can help investor to select the right stock, stock filtering and prevent investor choose stock that do not have good fundamental. Thirdly , stock valuation can help investor or trader to determine the fair price of the stock. Lastly, Desmond (2011) wrote that fundamental analysis help investor build and manage a healthy stock portfolio better.
2.1 Top – Down analysis
According to Santo Vibby’s book regarding the fundamental section of the chart pattern analysis (2008), Top – Down analysis start from analysis of macro - economy in Indonesia until micro economy analysis in corporate finance.
Macro economy analysis to know the thorough economy condition of the country . GDP (Gross Domestic Product) and the inflation rate are the two most important fundamental analysis indicator to know the economy condition of Indonesia . GDP measure the value of output of goods and services produced in a country usually in percentage and show the growth from the previous quarter.
Inflation rate is the rate that measures the level of product and services price that can be bought by consumer. The high inflation number is shown from the increase price of the product and the increase of interest rate from Bank of Indonesia. If the interest rate is increasing usually is followed by the increase of credit interest rate from the bank. Therefore it gives additional burden to the company especially company that use loan from the bank for operational expense and expansion. Those expenses will decrease company net profit ,thus also decrease the stock price.
It is added by Desmond (2011) that Sector analysis can help investor understand characteristic of each sector and anticipate a thing that can affect those sector.
There are several sectors in Indonesia with different characteristic according to Desmond Wira (2011) : * Agriculture and plantation sector such as (LSIP,UNSP,SGRO) which are highly dependent on international commodity price of Crude Palm Oil. This Sector has a stable growth in the long term because CPO is a primary needs in all of the country in the world for producing cooking oil and biofuel. * Mining/ oil/ metal sectors such as (ITMG,BUMI,PTBA,ADRO,ANTM,INCO) which are highly dependent to international oil price. International oil price has direct relationship with commodities price. * Chemical industry and infrastructure sector such as (BRPT,INKP) which are highly dependent to corporate action. These sector stock price movement is difficult to predict because the stock price move independently. * Various industry sector such as ASII which is highly dependent to interest rate from the bank and inflation number in the country. Inflation number has inversely relationship to stock price in this sector. * Consumption sector such as (INDF, ICBP,UNVR and GGRM) categorized as defensive stock. These sector stock price have high probability to increase during crisis because these sector is needed by people. * Property sector such as (ASRO,APLN,CTRA) which is highly dependent to economy condition and inflation rate. * Banking sector such as (BMRI,PNLF,BBCA) which are sensitive to economy issue,interest rate and inflation.
3. Technical Analysis of Stocks Trends
Technical analysis is the technique to analyze the price fluctuation in a certain timeframe or in its relations with other factors such as transaction volume (Vibby, 2008). Technical analysis is well known of its graphic usage. From the graphic movement, they can tell that there is certain pattern that investors can use as a base to determine the entry point to the market, whether it is to buy or to sell.
Most used graph or chart in technical analysis are line chart, bar chart and candlestick chart (May, 2011). The line chart only gives the closing price data which makes it the easiest to interpret. Bar and candlestick charts are similar because they both tell the open price, closing price, highest and lowest price of certain timeframe, even though candlestick is more popular as it is easier to see.
In all financial instrument, there are three types of trend; uptrend, downtrend and sideways. Uptrend is a trend when the price is tend to go up, downtrend is a trend when the price tend to go down, sideways trend/trading is when the price doesn’t fluctuate too much (Vibby, 2008).
The next important thing in technical analysis is support and resistance line. According to Wira, support line is a price level in which the level supports so the price can’t fall further, while on the other hand the resistance line is a price level where the selling action is quite significant which prevent the price from going further up. Breakout is when the price pass through the resistance line and when it happens, the resistance line become the new support line, in contrary breakdown is when the price pass through the support line and therefore the support line become the new resistance line.
The graph and chart in technical analysis can be interpreted to a lot of pattern. There are three categories of patterns, which are continuity pattern, consolidation pattern and reversal pattern. (Wira, 2012) To help determine and noticing a pattern, investors can use mathematic formula known as technical analysis indicator. The key indicator that writers will focus more in is Moving Average indicator as an indicator to know the trend.
In his book, Technical analysis for maximum profit (2012), Desmond Wira agreed that moving average is a quite popular indicator among traders and investors. MA indicator counts the average price movement of a financial instrument in a certain timeframe, for example: 5 days, 20 days, and 100 days. There are several variations of moving average: simple moving average (SMA), linear weighted moving average (WMA), exponential moving average (EMA), and smoothed moving average. The difference among all those variations is only in the sensitivity given by each indicator. Smoothed moving average is the less sensitive moving average and therefore used more by long-term investor. Beside to identify trend, moving average can also be used to identify reversal trend and determine the support and resistance level. When using Moving Average as an indicator, traders can use more than one MA indicator.
To know the trend, traders can see from the position of the moving average towards the price. When the moving average is above the prices, it means that the price of the financial instrument is in a downtrend, and vice versa. To know the reversal point, traders can see from when the Moving average line crosses with the price.
The other use of moving average is as support and resistance level. When the price moving towards the moving average level usually the price will bounce which make it seems like it act as support and resistance level.
Short-term moving average is usually used as a signal for short-term trading while long-term moving average is used to know the main trend. 4. Relationship between Fundamental and Technical Analysis
CASNSLIM strategy is one of the combination strategy between technical and fundamental analysis. As stated in Desmond Wira’s book, Stock Fundamental Analysis (2011), CANSLIM strategy appears in book of How to make money in Stocks: A winning System in Good times or bad by William J.O’Neil. William can gain million dollar profit consistently by using this strategy. This strategy principle focus on finding growth stock that has high potential of getting net profit through fundamental analysis.
Based on American Association of Individual Investor report since January 1998 – December 2008, performance of the portfolios managed based on CANSLIM give average return / profit of 1.351,3% regardless bullish or bearish market.
Criteria for stock selection that has good fundamental use several principle:
1. C (Current Earnings) ,EPS,Earning per share ,in the last quarter at least growing 25% compare to previous year of the same quarter
2. A (Annual earnings). ROE, return on equity at least grow by 17% in the last 5 consecutive years.
3. N (New Prodcut / services)
4. S (Supply and demand). This principle suggest investor or trader to focus on smaller corporate.
5. L (Leader or laggard) . This principle suggest investor to choose the leading stock in a leading industry by using indicator RSR,(Relative Strength Rangking)
6. I (Institutional Sponsorship) this principle suggest investor to pay attention to big institution as indicator of the increase of stock price in the future.
7. M (market Indexes)

The next step after choose growth stock is to find out the right time to to enter in the market. Technical analysis strategy is to buy the stock before the price goes up. William suggest to buy the stock based on weekly chart during consolidation and find a pattern of cup and handle.
William O' neil suggest investor or trader to do cut loss if the price goes down by 8% from buying price because CANSLIM is not magical formula that always work 100%.
5. Summary
Desmond (2011) stated that fundamental analysis can help investor or trader find the best fundamental stock for long term or short term investment. Fundamental analysis help investor or trader to create the healthy watch list. While technical analysis can help investor or trader to know when to buy or sell the stock at the right time. But again, out of the technical and fundamental analysis, Lim suggest in his book “The secret psychology of millionaire traders” (2008) that traders should trade what they can afford to lose. With this mindset, trader will focus the objective on trading to trade well rather than not losing.

III. Research Methodology
A. Hypothesis
The initial assumption of the researchers before conducting the research is that the usage of weighted moving average as a technical method and simple trading plan as a fundamental approach can help Indonesian trader and/or investor to trade better which results in gaining consistent profit. B. Research Framework
Multiple linear regressions is used to test the impact of using both analysis method (Technical analysis method as independent variable 1 or X1 and Fundamental analysis method as dependent variable 2 or X2) towards the dependent variable which in this case consistent profit.
Technial
Analysis (X1)
Consistent
Profit (Y)
Fundamental
Analysis (X2)

Then researchers will compare it to the usage of only one the analysis method each, using the simple linear regression method.
Technical
Analysis (X)
Consistent
Profit (Y)

&
Fundamental
Analysis (X)
Consistent
Profit (Y)

C. Research Design * Research Approaches = Deductive
Deductive research approach or also known as “top-down” approach is a research approach which focuses on testing and verifying rather developing one. Deductive thinking model used in quantitative study to verify a hypothesis through examination (Creswell, 2002).

* Research Strategies =
Survey
A survey is a quantitative research strategy which studies the sample of certain population in a numeric description of trends or opinions (Creswell, 2002). Survey is used in this study instead of experiment because the variable in this study can’t be controlled and the study is done by observing the data available from the source.

* Time Horizon =
Cross-sectional Studies
Cross-sectional study is a research study which collects data one point at a time to observe certain variables over time (Creswell, 2002). This study is a cross-sectional study because the data is taken at one point of the time in the past and it is not used to compare between years as in longitudinal studies.

* Research Purpose =
Explanatory Research
The explanatory research design is used to explain and interpret the findings from the collected quantitative data (Creswell, 2002). The purpose of this study is to explain the relationship between fundamental and technical analysis in analyzing the stock trends and financial markets in Indonesia Stock Exchange and how weighted moving average and simple trading plan can help Indonesian trader or investor in gaining consistent profit.

* Data Collection Method =
Survey Method:
The data collection is done by taking the sample of 5 companies from LQ45 (ASII, UNVR, KLBF, ADRO, TLKM) for 3 consecutive years (2010, 2011, 2012). Researchers assume that 5 samples are enough to verify the correctness of the hypothesis (chosen through CANSLIM filter method) and 3 years are assumed to be the most efficient time to be analyzed. * Data Analysis Method =
In analyzing the data, the researchers choose to use the linear regression method because they are trying to test the effect of one or more metric independent variable(s) towards the metric dependent variable.
In this case the dependent variable is the result which is consistent profit. There will be three linear regressions done. The first one is the multiple linear regressions which consist of technical analysis and fundamental analysis as the independent variables. The second and third will be a simple linear regression with each technical and fundamental analysis as the independent variable. The researchers then will compare the results to prove the hypothesis.
The fundamental analysis in this research limited to only use the CANSIM method in choosing the stocks:
1. C (Current Earnings), with earning per share in the last quarter of the company at least growing 25% compare to previous year of the same quarter
2. A (Annual earnings). ROE, return on equity at least grow by 17% in the last 5 consecutive years.
3. N (New Prodcut / services). The company is productive which means continue launching new product and services.
4. S (Supply and demand). Choose the company which with a lot of transaction portfolio.
5. L (Leader or laggard) . This principle suggest investor to choose the leading stock in a leading industry by using indicator RSR,(Relative Strength Rangking).
6. I (Institutional Sponsorship). To see whether there is any big institution such as bank, is funding the company. The principle suggests investor to pay attention to big institution as indicator of the increase of stock price in the future.
7. M (market Indexes). The trend of market index is also important to choose which stocks to trade.
For the technical analysis, this study limits to only Moving Average method. Moving average method is done by averaging the price over certain period of timeframe depends on the user preferences. For example: Daily MA 30 means the average price of the stock over 30 days will be shown in a line. Daily MA 10 means the average price of the stock over 10 days. In this study, researchers will use MA 30 and MA 10.
The buy signal of the stock is when the trend is in the uptrend weekly there is a golden cross (when the line of MA10 crosses above MA30 line). The sell signal is when the dead cross occur, which is when the line of MA 10 crosses below MA30 line or when the price has fallen 8 – 10% of the open price (cut loss).

* Limitation of the Research
The limitation of the research is that the technical analysis method used is limited, constrained to only Moving average method. The fundamental analysis method used is constrained to only the CANLISM method. The timeframe of the research is also limited to 3 years of data survey. Last but not least, the sample is only limited to 5 filtered companies from 5 different industries in the LQ45. Therefore the result of the research may not totally represent the total sample population.

References
Creswell, J. W. (2002). Research Design: Qualitative, Quantitative, and Mixed Methods
Approaches. Canada: Sage Publications, Inc.
Daniri, A. (2008). Proses go public dan mekanisme pencatatan saham di bursa efek
Indonesia. Retrieved from http://www.madani-ri.com/2008/02/11/proses-go-public-dan-mekanisme-pencatatan-saham-di-bursa-efek-indonesia/
Khoo, A., Lim, C. A., & Huang, R. (2011). Profit from the panic. Singapore: Adam Khoo Learning Technologies Group Pte Ltd.
Lim, C. A. (2008). Secret psychology of millionaire traders. Singapore: Adam Khoo Learning Technologies Group Pte Ltd.
May, E. (2011). Smart traders not gamblers. Jakarta: Gramedia.
Taulli, T. (2012). 4 Reasons companies go public. Retrieved from http://investorplace.com/ipo-playbook/4-reasons-companies-go-public/ Vibby, S. (2008). Jual saham anda lebih mahal. Jakarta: Vibby Publishing.
Vibby, S. (2012). The stock market secret profits of when to buy & sell, candlestick can tell. Jakarta: Wealth & Grow.
Wira, D. (2011). Analisis fundamental saham. Jakarta: Exceed.
Wira, D. (2012). Analisis teknikal untuk profit maksimal. Jakarta: Exceed.
Wira, D. (2012). Stock investing wisdom. Jakarta: Exceed.

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