Technical Analysis vs Fundamental Analysis
By Dale Gillham |
Technical and fundamental analysis are the two main forms of analysis for financial markets but what’s the difference between technical and fundamental analysis and which strategy should I use?
Technical analysis simply looks at the data of price, pattern and time to analyse the movement of a stock or market. The assumption is that what has occurred in the past will likely occur again in the future.
So a technical analyst uses patterns in market data to identify trends and make predictions about where the stock is likely to go based on how it unfolded in the past.
Fundamental analysis, on the other hand, is a method of evaluating a company in an attempt to understands its intrinsic value. This is done by examining economic, financial and other factors that influence the business.
In short, this is called value investing as the analyst is attempting to identify a stock or market that is undervalued in order to enter into the stock or market, and looking to identify stocks or markets that are overvalued to exit the stock or market.
Technical versus fundamental analysis: which one should I use?
There are often two distinct camps here, and both styles of investors will argue that the one they use is better and dismiss the other as rubbish or of little value. However, this need not the case as both a valuable and both have their positives and negatives.
The style of analysis you chose to use will depend on your own personal preference and how you wish to manage your portfolio or stocks. What I mean by this, is that in most cases a technical analyst and fundamental analyst have different goals in mind.
The technical analysts attempts to identify trends where they can enter and exit over a shorter period of time such as up to 18 months.
Given this, the technical analyst is essentially looking at the strength and weakness of buyers and sellers of the stock.
On the flip side, fundamental analysts attempt to take long-term positions in a stock and, as such, the analyst is more concerned with the underlying profitability, asset base and business practices of a stock.
So what kind of analyst am I? Well I am mainly a technical analysts, however, I do use fundamental analysis in my research.
We also teach both methods in our flagship course the Diploma of Share Trading and Investment and how to use both methods to your advantage.
What form of analysis do we teach at Wealth Within?
Well, when we conduct our analysis we start by looking at the charts of a company and applying some technical analysis to it, and then we conduct a fundamental analysis review of the company’s financial statements. Doing both ensures we get higher probability of being on the right side of the market.
Often fundamental analysts spend countless hours attempting to analyse a company’s financials, only to not purchase it. But using technical analysis makes the process much quicker, as you can narrow down your selection prior to undertaking further analysis.
Fundamental analysts assume that the market is under priced a stock over the short-term, but that the price of the stock will correct itself over the long run; in other words, they are working out if a stock is over or undervalued. So, the fundamental analysis is looking at what to buy or sell, while the technical analyst is looking at when to buy and sell and here is the value in why I use both in my trading.
Often times, this combination works best when a stock is severely oversold and entering a position too early could prove to be costly given that investors who use only fundamental analysis, often buy only to see their position continue to fall. The reverse also occurs where investors are exiting an overvalued stock, with the stock rising after they exit.
By combining both methods, however, it gives you the best of both worlds.
For those of you who are new to the markets wanting to get into trading but you are not really sure how to go about it or you just want to get the basics so you can try trading in a low risk safe way, then our Trading Mentor Course is perfect as we support and teach you about both methods of analysis and how to use them to start profiting from the market quite quickly.
If you want to know more give us a call and we can chat to you about what you want to achieve in the market and how you might go about achieving your goals.