Which should you use: Fundamental or Technical analysis?
Unfortunately finding the right stocks to invest in is not as easy as one would want it to be. Strategies such as Fundamental analysis and Technical analysis have to be employed to help the process. One strategy is not necessarily better than the other; you just have to find what works for you.
Understanding Fundamental Analysis
Fundamental Analysis takes a look at the company’s financial standing. It also takes into consideration the industry you are interested in and the general health of the economy. With this analysis, the Future profit outlook will be considered, the Industry will be analyzed, the company will be analyzed, and the Macroeconomic conditions will be considered.
Things such as assets, liabilities, earnings, and expenses will be carefully scrutinized. Such information is especially useful for long-term investors and if the right stock is picked then good profits can be enjoyed.
Generally, long-term traders will opt for Fundamental analysis
Understanding Technical Analysis
Technical Analysis is concerned with a given stock’s volume and price. Price action is important for determining the supply and demand dynamics of a given stock. Price charts are looked at, indicators are utilized, and oscillators are used. The charts help you determine what the stock will potentially look like in the future. Trends and patterns in the chart help determine the future of the given stock.
When using Technical Analysis, it is important not to stick to just one indicator. It is prudent that you make use of more than one method or indicator to identify entry points, trends, or stop-loss levels. Don’t worry about conflicting views, but rather practice patience in waiting for another signal.
Generally, short-term traders will opt for Technical Analysis.
What is the difference between the two?
Fundamental Analysis takes into consideration the company’s value while Technical Analysis takes into consideration the price action. With Fundamental Analysis, the difference between the price at which the stock is trading and its value is what is considered.
With Technical Analysis, on the other hand, only volume and data are considered.
Pros and Cons of each
- Good for long-term investment
- Potential to set the global price
- In-depth knowledge of the company’s actual worth
- Possibility to manage portfolio risk through the premium calculation to fair value for stock trading
- Time-consuming and tedious
- Potential of investing in the right stock at the wrong time and having to hold onto it for longer
- It is possible to quickly analyze stocks
- It is possible to automate some tasks thus saving time
- Target price prediction is possible
- Fast analysis
- May produce an ambiguous result
- Backtesting technical approaches aren’t always possible
- A good judgment call is crucial
As stated before, one strategy may not necessarily be better than the other. You may find that you need to utilize both in certain instances or you may find that you need to utilize one over the other for the stocks. Whatever you decide, research is important to avoid unnecessary blunders.