The Difference Between Technical and Fundamental Analysis in Trading

Whether you’re new to stock trading or have been investing for years, deciding which stocks to buy can be tricky. How do you choose stocks that will rise in price over the life of your investment? Some make wild guesses. Others spend a great deal of time researching each company until they have a deep understanding of all the conditions that may influence a stock’s price. Either approach can work. So, how do you decide?

Analysis is a big part of being successful in the markets, and there are two main schools of stock research thought. Fundamental vs technical analysis of the markets is a debate that can have serious ramifications in terms of your confidence and the amount of risk involved. Understanding the two is key to making the best decision for both you and your hard earned money.

Fundamental vs Technical Analysis: What’s the Difference?

When it comes to forecasting the rise and fall of stock prices, most analysts gravitate toward either fundamental analysis techniques or technical analysis techniques. There are some other ways people make stock purchases, including simply guessing or taking huge risks in hopes of a big payoff. Still, fundamental and technical analysis are generally viewed favorably by millions of investors around the world.

Let’s look at the difference between the two in this fundamental vs technical analysis breakdown.

Fundamental Analysis

Fundamental Analysts pore over everything from financial statements to the new product pipeline to get an idea of a company’s intrinsic value before investing. What is the company doing well, and what needs work? If shares are trading below the company’s intrinsic value, you are getting a bargain, and it’s a great time to buy. If they are trading above that value, you may want to wait before making your purchase.

While a solid analysis approach, fundamental stock analysis takes considerably more time to conduct than technical analysis, and may not be for beginners or those strapped for time. If you like to make quick but informed decisions that are more in line with your gut feelings, technical analysis is the ticket.

Technical Analysis

Technical analysts take the opposite approach to investing. Rather than spending their days combing through quarterly reports and market conditions, they use statistical trends in the charts themselves to decide when to buy and when to sell. The idea is that the stock’s history tells us all we need to know about how it will perform in the future. The speed at which they can come to these conclusions is essential to the way they invest.

If there is a main difference in trading styles between advocates of fundamental vs technical analysis, it is that fundamental analysts tend to be looking for long term value and safe bets, where technical analysts are looking to flip stocks and make solid money more quickly. 

Fundamental Analysis Factors

In a fundamental analysis, we take a more traditional approach to gauging the value of a company. The factors we scrutinize are the backbones of business valuation and can take a long time to analyze since some of these data points may only be released yearly or quarterly. Some valuable factors like new products or mergers may be in the pipeline as well, so this in-depth analysis where we compare stock fundamentals gives us a lot of valuable info. Here are some factors you’ll want to look at:

  • Quarterly revenue
  • Quarterly earnings per share
  • Balance sheets
  • Strength of company management
  • Strength of the product
  • Any associated intellectual property
  • New product pipeline
  • Number of institutional investors

As you can see, each item on the list may include a fairly complex calculation that takes many pieces of data into account. That’s why, in the battle of fundamental vs technical analysis, fundamental analysis is a much more time consuming process. Technical analysis uses a different set of data to identify well informed stock buying and selling windows.

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Technical Analysis Signals

Technical analysis allows us to gauge when to buy and sell based on signals in the graph itself. People used to pore over graphs for much of their waking life to see these signals, but luckily, there are now fantastic technical analysis tools to give you instant access to these metrics. That allows you to spend your time making money rather than reading charts.

Here are some of the main signals you’ll be looking for in a technical stock analysis.

Simple Moving Averages

Moving averages are a simple concept but give us a good amount of information regarding where a stock has been and where it is likely to be heading.

Simple moving averages are obtained through adding up the share’s closing prices over a period of time, often 30 or 50 days, and divides the total by the number of days in the period. The average is considered moving because the period resets at the close of each trading day, and it continually reflects the average of the most recent period. There are some variations on moving averages, but simple moving averages give us a quick look at whether a stock’s price is trending upward or downward.

Support and Resistance Levels

Support and resistance levels are important indicators in technical analysis that give investors a good idea of when to buy and sell stocks. The levels are established through trendlines that tell us when stock prices are likely to change direction.

The support line is the line that indicates when falling stock prices are likely to rebound. This line is generated very simply by pulling up a 30 day stock chart and drawing a line connecting the low points in the graph.

The resistance line is the exact opposite. We get this line by connecting the high points in the chart, and when levels approach that line, it’s a good indicator to sell.

When the graph crosses either the support or resistance trendline, we see what’s known as a breakout, and it has implications that depend upon which line was crossed. In a bearish breakout, the graph falls below the support line and often drops dramatically. In a bullish breakout, the graph spikes above the resistance line, and huge profits can be made.

Momentum Indicators

Another great set of indicators that help us decide when to buy or sell are momentum indicators. Momentum indicators analyze stock price trends and show us whether the price is trending upward, downward, or staying level. There are three main momentum indicators we use in technical analysis:

  • Moving Average Convergence Divergence (MACD) - 
  • Relative Strength Index (RSI)
  • Rate of Change
  • Stochastic Oscillator

Each of these indicators create a trade forecast through some fairly complex calculations and were previously the domain of experienced stock experts. Luckily, modern technology has made this information readily available to traders at all levels.

Fundamental vs Technical Analysis: Which is better?

In the world of fundamental vs technical analysis, there are hard core devotees to both schools, and they will happily argue one over the other with you. Much of that comes down to personal preference, as there is no study that has ever proven one method better than the other, and no study could do such a thing. Markets fluctuate, and there is no way to predict the future with absolute certainty.

As with most things, taking multiple pieces of information into account is a good thing. Is it helpful to understand the health of a company and its place in the market before investing? Absolutely. But how do you know when to buy and when to sell? Combining the two approaches gives you the best of both worlds.

Also, what type of investor are you? If you prefer safer bets and are looking to invest long term, fundamental analysis will give you the information to make relatively safe investments. Forex trading would be much more involved since we’re dealing with countries and regions rather than companies. Technical analysis might be the ticket there. 

A fundamental vs technical analysis takeaway may be simply this. When you want a safe bet on a solid company that will produce modest returns over the long haul, fundamental analysis is fantastic. If you are looking to capitalize on opportunities in the short term, technical analysis gives you data much more quickly and can allow you to make those riskier moves with the best information possible.

Fundamental vs Technical Analysis: Getting the Right Support

Trading stocks is always easier when you’ve got the right support built into your decision making process. Whatever side of the fundamental vs technical analysis debate you fall on, getting advice from trading professionals and utilizing robust trading tools are invaluable in obtaining the information you need to make informed decisions.

Our technical analysis and trading tools have helped investors around the world make sense of stock charts and use them to build a nest egg for their future. Before you make your next stock purchase or sale, why not see for yourself how we can provide the support you need to make those decisions based on the best possible information.

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