Fundamental vs. Technical Analysis


Fundamental analysis and technical analysis are two different ways of looking at stocks. Fundamental analysis looks at how a company operates, the market in which it operates, and the finances of the company itself. Fundamental analysis also looks at the stock price in comparison with the financial information of the company. Technical analysis focuses on data generated by the stock market itself, mainly focusing on stock charts, stock price, and volume. Technical analysis is based on the premise that a past stock chart and price can be used to predict a future stock price.  Let’s take a deeper look at both, determine what type of analyst you resonate with.

Fundamental Analysts choose to invest in stocks that show signs of growth. They are more concerned about whether a stock is positioned for growth, not taking the price of the stock into consideration. Fundamental Analysts use fundamental analysis to interpret the value of a stock. They use  statistics such as current earnings, historical earnings growth, P/E ratio, forward P/E ratio, as well as how the company is managed from the perspective of keeping costs down.  Fundamental Analysts pay close attention to the earnings reports and earnings calls put out to the public.

Technical Analysts, sometimes called chartists, use historical market data about price and volume to predict the way price will move in the future. Three tools used in technical analysis are chart patterns, technical indicators, and price action. The driving principle behind technical analysis is the efficient market hypothesis, which states that the current price of an asset reflects all known information.

Technical indicators are mathematical calculations that show the statistical relationships between price, volume, and other market data over time. These indicators can be used to identify certain market conditions. The indicators that I personally trade with are the MACD (Moving Average Convergence/Divergence), Slow Stochastic Indicators, the RSI (Relative Strength Index), volatility indicators like Bollinger Bands and Keltner Channels, and trend indicators like Parabolic SAR’s (Stop and Reverse).  I also make sure the stock has plenty of volume.  I do not trade low float or penny stocks!!!

Fundamental analysts and technical analysts have very different ways of looking at the Stock Market. However, I have found that combining both of them into your own personal investing style offers better results than using one or the other. This allows you to buy stocks with good fundamentals and time your trade with technical analysis that tells you the optimal time to sell out the trade.  Most importantly, you need to know what type of analyst you are and make decisions based on your comfortability with risk!!!