Techinical vs Fundamental Analysis

Both technical and fundamental analysis are commonly used in the investment world. Both of these methods have supporters and there is some disagreement as to which method is the best to use. Here are the basics of technical and fundamental analysis.

Fundamental Analysis

With fundamental analysis, investors are trying to determine the intrinsic value of a security. In the stock market, those that employ fundamental analysis utilize financial statements regularly. They will look at things such as earnings, debt, price-to-sales ratio and price-earnings ratio in order to determine the value of the company.

Technical Analysis

With technical analysis, investors are going to look at price information. Instead of looking at financial statements, they look at price charts. Technical analysts believe that everything they need to know is in the price of the stock. They believe in the efficient market theory that all of the fundamentals of a company are included in the current market price. By using this method, they are hoping to be able to identify patterns in the price history of a stock. When they identify these patterns, they will trade to make a profit with them.

Time

These two methods have a few differences when it comes to time horizons. With fundamental analysis, they consider what they are doing to be investing. This means that they are taking a more long-term approach towards their investment decisions. They are trying to find a company that is undervalued and then invest in them so that they can take advantage of long-term growth. Technical analysis is considered to be trading instead of investing. The individuals that utilize technical analysis have a more short-term approach to their investing. Most of the individuals that consider themselves to be day traders use technical analysis. They are trying to take advantage of short-term movements in the market and profit from them. 

Critics of Technical Analysis

Fundamental analysis was long thought to be the only way to legitimately analyze a stock. Most experts agreed that technical analysis was simply a fad that was destined to pass. For many years, the experts believed that there was no merit in technical analysis and disregarded it completely. However, in recent years, technical analysis has started to grow in popularity. Many experts now utilize forms of technical analysis in their everyday processes. While it still has not been widely accepted like fundamental analysis, it is starting to become more common.

Combining

Many investors today believe that a combination of these two approaches is going to be the best way to analyze a security. This way, you are getting the best of both worlds. You can look at fundamental factors in order to get a general idea as to how a company is valued. Then, you can use technical analysis in order to determine an exact entry point into the market. By doing this, you will be able to increase your returns and cut down on unprofitable trades. 

blog comments powered by Disqus
Scottrade