Fundamental Analysis vs Technical Analysis

"FUNDAMENTAL VS TECHNICAL ANALYSIS & THEIR APPLICATIONS IN STOCK INVESTMENT" When issuing buy, sell, or hold, recommendations, an analyst is most likely to have undertaken a large amount of detailed research. Companies that are being analyzed will be compared to others that trade within the same business sector, and also against the economic outlook. Up-to-date data will be used, and this information will be manipulated to produce comparable theoretical valuations, from which an investment recommendation can then be made. There are ways to mitigate the risk of investing in stocks and trusting in the fortunes of companies controlling them. Investment professionals use technical and fundamental analysis to try to foresee a company's future stock performance. “Fundamental Analysis: A method used to evaluate a tradable asset by attempting to determine its intrinsic value. This involves the broad study of markets and analysis of the overall state of economies, production, and employment.” “Technical Analysis: The evaluation of a tradable asset by studying chart activity (price and volume) and the statistical outcomes of various scenarios. Technical analysts don't measure an asset's intrinsic value but instead focus on identifying trends and price patterns that suggest the likely future outcome for price movement.” Fundamental analysis often assumes that the short-term market price is incorrect, but that the value will correct itself in the long run. Profits are made by buying or selling a mispriced asset and then waiting for the market to correct its "mistaken" current price. Technical analysis is the complete focus on an asset's price chart because of the belief that all of the fundamentals are already "priced in" to the market. It looks at the movement of price, momentum, and the structure of the market to find patterns that lead to high probability outcomes. Recognizing these patterns and their positive expectancy allows traders to enter the market and exit later at a better price for a profit. A major difference between both the stock analysis methods is the time frame over which they are conducted. Fundamental analysis looks at a company’s balance sheet, cash flow statement and income statement whereas technical analysts believe that all the available information is already priced in which leaves further analysis about the financial information superfluous. Fundamental analysts read the quarterly statements which are released quarterly and hence have to look at a longer time frame of a couple months or years to see how the company is performing. Technical analysts simply look at the price and volume fluctuations which can be done on a weekly, daily or even minute by minute basis. Hence any investment through fundamental analysis would be a longer term commitment whereas technical analysts are known to close their trades within a week. Fundamental Analysis vs Technical Analysis The Differing Approaches of Fundamental and Technical Traders and Application in Stock Market So here's where things get interesting. Both of these analysis techniques (or a combination of them) can be quite profitable in the right hands, but let’s consider the differences between traders of fundamental analysis vs technical analysis. The Fundamental Analyst To be a fundamentals trader often requires you to put in a great deal of study each day. There are always recent economic reports to read, news events and publications to take in, and a huge amount of global factors to consider at any given time. Fundamental analysis can be powerful, but it often takes traders months or even years to get a good grasp of all the various pieces of the economic puzzle. Not only that, but there is no time to slack off once you've reached a level of competence in your fundamental analysis. With the huge range of shifting factors involved, even taking a day off from studying economic events can leave you puzzled and confused. Many of the best fundamental traders spend three or four hours every single day studying in order to prepare their trading setups. The Technical Analyst Technical traders on the other hand have a much simpler approach, but that doesn't mean it's always easy. A technical analyst needs to know their market and the way it moves through dozens of hours of chart study. They need to be able to recognize patterns and see them play out often enough that they can be confident in their statistical edge. The benefits of being a largely technical-focused trader are numerous. Once you've developed your pattern recognition and confidence, it's much easier to stay near the top of your game. Technical traders can sit down in front of their charts five minutes before the market opens and feel 100% prepared to trade as the market develops. What matters to a technical trader is how price is reacting to various areas NOW. There's no need to be overly clever by trying to figure out if the market is priced imperfectly, because as far as they are concerned the current price is all there is. Properly applied, this simplicity in analysis leads to simplicity in execution and excellent results. How to combine fundamental and technical analysis for beneficial stock investing Fundamental analysis helps you understand what to invest (or trade or speculate) in, whereas technical analysis guides you as to when to do it. Because markets ebb and flow, technical analysis can help you spot low-risk points to either enter or exit a trade. Technical analysis, therefore, helps you stack the deck a little more in your favor. Considering how markets have been going lately, every little bit helps. Blending the two approaches to some extent has been done with success. Obviously, if the fundamental and the technical factors support your decision, then the chance for a profitable trade has more going for it. How does this blend occur? For an example, look at the concepts of oversold and overbought. If you’re looking at buying a stock (or other investment) because you think it’s a strong investment but you’re not sure about when to buy, you want to look at the technical data. If the data tells you that it has been oversold, it’s a good time to buy. Oversold just means that the market was a little too extreme in selling that particular investment during a particular period of time. The technical terms oversold and overbought have a parallel to fundamental terms such as undervalued and overvalued. Because fundamental analysis is a major part of a school of thought referred to as value investing, the concepts make sense Just as investing in an undervalued stock is usually a good idea, so is buying a stock that has been oversold. It’s logical to presume that an oversold stock is undervalued (all things being equal). Of course, the other terms (overbought and overvalued) can also run in tandem. On the other hand, the fundamentals can help a technical analyst make a better trading decision. Say that a technical analyst has a profitable position in a particular stock called Getting Near a Cliff Corp. (GNAC). If the technical indicators are turning bearish and the new quarterly earnings report for GNAC indicates a significantly lower profit, then selling GNAC’s stock is probably a good idea.