Technical and Fundamental Analysis are the two most common types of analysis to perform when trading stocks. They are used by day traders together and/or independently. As an example, fundamental traders will often use technicals to determine exit and entry points for fundamentally solid companies. Whereas, technical analyst traders will often use company fundamentals to limit their pool of companies they are analyzing technicals on.
What is Fundamental Stock Analysis?
Fundamental analysis values a company’s stock price as being priced below market value. The belief of fundamental anaysis has that these types of companies will eventually reach their true value based on market forces. Profits are attempted to be made by buying stocks of company’s with great fundamentals priced below their peers and then hoping the stock recovers to near its competitors’ levels. The common business tools used to evaluate the fundamentals of a company include:
- Price/Earnings Ratio
- Dividend Ratio
- Financial Statement Analysis
- Core Competencies
- Competitive Landscape
- Future Earnings Potential
- Positive Potential Catalysts
- Management Planning and Ability to Execute
What is Technical Stock Analysis?
Technical stock analysts (referred to as technicians) could care less about the fundamentals of a company. Technical analysis believes that stocks are priced fairly based on market access to information about the company. Trends are created by sentiment changes in the given market for a stock and exploitation of these trends are hoped to be possible by technicians. Technical analysis looks at the historical trends of data focusing primarily on price and volume. Also, history repeats itself and since history repeats itself, it is wise to use the historical performance of stocks in predicting their future price movement.
Technicians rely on a surplus of tools. Each technician has their assortment of tools they like to use and rely upon. The following is a list of several of these tools which evaluate price and volume history patterns:
- Relative Strength Index (RSI)
- Moving Averages
- Stochastic Charting
- MACD Charting
- Dow Theory
- Open High Low Close Charts (OHLC)
- Momentum
- Elliot Wave Principle
- And many, many more…
In summary, there is elements of truth to both Fundamental Analysis and Technical Analysis, and evidence to show they both work in some scenarios. Those who combine these two strategies may be able to beat the averages. However, long-time famed stock trader Warren Buffett has said, “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer” and “If past history was all there was to the game, the richest people would be librarians.” Bottom line then, do you know any librarians? I do and they are not technicians.