Fundamental Vs Technical Analysis
There are two major analysis method to assess stocks and predict the future price movement. Fundamental analysis look into the economic factor of a stock, whereas technical analysis studies the history market activity statistics of a stock through charting and uses the data obtained to predict the future movement of the underlying stock price.
Two Different Assumptions
In technical analysis, it is assumed that the market is efficient, that the price of a stock at any point of time has already factored in everything that could affect the price of a stock, including the fundamental factors and the market psychological factors. However, in fundamental analysis, it is believed that the price may be differ from the intrinsic value of an underlying stock due to human emotions and error, therefore the market is not efficient. When a stock price is below the intrinsic value, it is called an undervalued stock, and the reverse is called an overvalued stock.
Technical analysis assumed that the price move in trends. Once a certain price movement pattern has been formed, the chart is expected to follow the trend rather than against it. In fundamental analysis, the price is believed to be affected by the change in the economic, financial and market factors and therefore the future price movement cannot be predicted by studying the historical price.
Technical analyst assumed that history tends to repeats itself and price patterns will repeat the same way to the same market stimuli. The market is thought to be a simple if A, then B equation. On the other hand, the fundamental analyst do believe in another philosophy that past performances does not guarantee future results. A stock that peaked at $104 per share two years ago does not mean that it will go back to $104 few years later.
The Research Materials
The technical analysis looks at the price and volume movements of a stock, and analyze the changes of two data. Data can be presented in the form of charts and graphs. indicators derived from the price and volumes of the stock is also analyzed to predict the price movement. For fundamental analysis, investors has to dip into the financial statements of a company to understand the quality of the business. On top of that, investors also need to understand the macro economics of the business and the nature of the business. Related market info such as the market price of the goods sold are also taken into account. For example, if it is a oil and gas company, the price movement of the crude oil is expected to affect the revenue of the company, and therefore the price movement of a company
The Time Frame
Technical analysis can analyse and "predict" the price movement for as short as minutes, up to as long as years (though it is rarely relevant). On the other hand fundamental analysis often applies to longer term investments. This is also coherent to the fact that the fundamental analysis takes time to perform, and the the fundamentals represent the actual nature of a business. Imagine a company's revenue will not increase right away after, for example, the setting up of a new plant. Even the commodity price surge due to a supply shortage report, it does not guarantee that the earning for the next quarter will increase to the same degree for the commodity company. Generally, technical analysis is used for short term trading whereas the fundamental analysis is applied to long term investment.
How to get the best of both world?
This depends on your investing goals and your financial + psychological strength. Traders buy a stock and hope to sell it to another buyer at a higher price soon. Investor picks the undervalued stocks and hold it until the real intrinsic value has been realized.
If your investment objective is to make fast money and you are willing to take a higher risk, you can use the technical analysis for fast trade, and be ready to perform cut lost when the price is not moving the direction you predicted. Trading is a game of probability. You must be ready to accept losing trades.
If you aim to achieve a long term, sustainable wealth growth, you are advised to study and understand the fundamental of the business. This is because by investing in a company, you must aware that you are in a partnership with the rest of the shareholders of the company. You own the business and therefore you must know what you own. Find a good company by using your knowledge, and buy it at the right price. You can incorporate the technical data into your buying decision, such as whenever the price drop too much and reached oversold position.
More tips to choose the right counter to invest and the right time to enter the market will be shared in a more advanced articles. Please subscribe to us and follow us on Facebook to stay tuned!
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