Investing Using Fundamental Analysis vs. Technical Analysis
Investing is a subject that is often debated, and even the most seasoned investors will tell you their opinion on what the best approach to investing is. While fundamental analysis focuses on the financial data and market conditions surrounding a company (mostly quantitative), technical analysis includes the price and volume of certain stocks, which can help predict a stock's movement (mostly qualitative).
Both ways of analyzing stocks are important because they offer different insights into a company. In this article, we look at the importance of using both fundamental and technical analysis to help you gain insight into a company's performance.
What is Fundamental Analysis?
Fundamental analysis studies economic factors that drive a stock's price. These factors include the company's financial statements, management, and competitive environment. Fundamental analysts believe stocks should be bought when trading at a discount to their intrinsic value.
Investors who use fundamental analysis typically perform extensive research before making an investment decision to determine whether or not an asset is worth buying. This research includes studying current and historical market data, analyzing balance sheets and income statements, and reading news stories about the companies in question.
Conducting this type of analysis requires a high level of expertise that only some possess, which is why most investors choose to hire professionals who specialize in this area of investing.
What is Technical Analysis?
Technical analysis is the study of market behavior through price charts. Some traders use charts to identify trends, chart patterns, and signals. The charting tools used by technical analysts include bar charts, line charts, point-and-figure charts, candlestick charts, and others.
Technical analysts use these tools to determine if an asset's price is currently overbought or oversold. They also look at moving averages and relative strength index (RSI) indicators to determine if a trend is likely to continue or reverse.
Technical analysts often use support and resistance levels to help them determine when to buy or sell an asset. These levels are created by drawing trendlines on a chart that connect price highs or lows over time. Once the price reaches one of these lines, it can be expected to bounce off the line or continue downward until it hits another level of support or resistance.
When using technical analysis for investment purposes, it's important to remember that past performance does not guarantee future results. For example, if an indicator predicted a downturn in the stock market last year but prices continued to rise, it would be inaccurate for an investor to use this indicator alone.
The Similarities Between Fundamental and Technical Analysis
There are many similarities between the two types of analysis. Here are some of them:
- Both provide a view of the market and help investors make informed decisions.
- Both fundamental and technical analysis can be used to help identify new opportunities or improve existing positions in the market.
- Both are used to evaluate risk and reward in an investment decision. For example, suppose you believe a stock will go up because it has underperformed its peers over the last 12 months. In that case, both fundamental and technical analysis can help you decide whether or not it's worth buying now or waiting until it gets closer to its trend line before making a purchase.
- Both look at historical data when making decisions about future performance. Those who use fundamental analysis may be interested in how well a company has performed over time. Those who use technical analysis will examine daily price patterns to decide future performance. Both methods can be useful for investors who want more certainty about their investment choices.
- Both types of analysts measure volatility over time using charts.
The Differences Between Fundamental and Technical Analysis
Both tools are useful but differ significantly in how they approach the market.
- Fundamental analysts use historical data to forecast the stock market's future performance. In contrast, technical analysts use charts to identify price trends and make forecasts about the future performance of stocks.
- Fundamental analysts do not rely on charts or technical analysis when making investment decisions; they base their decisions primarily on company-specific information such as earnings reports or sales figures.
- Technical analysts rely heavily on chart patterns and indicators such as moving averages or Bollinger bands to predict future price movements. The most common types of technical indicators include moving averages (MA), relative strength index (RSI), and the stochastic oscillator (STO).
Bottom Line
Fundamental and technical analysis are two approaches to investment and asset management. Fundamental analysts rely on data related to an underlying financial instrument, such as the company that issued the security and the market in which it trades. They also consider their research when making investment decisions. Some fundamental analysts will conduct their quantitative research, such as market research or financial modeling, to identify undervalued assets or weak points. If you want to get started on the road to long-term wealth, take a look at our Investing 101 course which gives you the tools to get started. Have any questions? Feel free to contact our team.







