Technical and Fundamental analysis are the two most commonly used tools to determining whether an investment is potentially attractive or not. One of the greatest misconception about Technical and Fundamental Analysis is the notion of idea that one is better than the other. This is relatively untrue because neither of the two is meant to replace the other on a general sense.
In truth, a trader should not employ their strategy solely based on either the one or the other. A combination of both is the best practice. Depending on your goal, Fundamental Analysis takes into account the basic aspect of a company’s financial strength and compares them with it’s competitor.
This type of trading is not ideal for traders with short term goals. As an example, Forex traders often looks at the general state of a countries economic standing and would compare this with another country. This takes time. Assessment on the key data must first be established to determine which stock to buy and when to buy it. In terms of commodities, CFD traders are often up to date with the seasonal variations in demand and supply. At the very least, awareness of pending news releases is also a must specially announcements regarding dividends that may have an impact on the company’s economic health.
A Technical Analysts uses a variety of tools and indicators to determine price action to predict where prices may go in the future. Some of these indicators are focused on identifying current market trend, including support and resistance areas, while others are focused on determining the strength of a trend and the likelihood of its continuation. They believe that history tends to repeat itself. They believe that the reoccurring nature of price movements is often attributed to market psychology which makes future price movement predictable and more likely to be in the same direction as the trend than to be against it. This belief is considered as the cornerstone of technical analysis.
On a Technical analysis, there is no need to analyze a company’s financial statements because the stock price already includes all relevant information. Instead, the analyst focuses he’s attention on the stock market chart for hints into where the price may be headed.
Short to medium term trades are identified for similar patterns that have formed in the past, and from this trade ideas will be formed believing that price will act the same way that it did before.
Now, although Technical analysis and fundamental analysis are often seen as opposites, many investors have actually experienced big success in making money in the market by using both techniques.
As an example, an investor may use technical analysis to find a specific entry and exit point for the position and identify an undervalued stock through fundamental analysis. Some of these technical traders may use fundamental analysis to support their trade.
The idea of mixing both techniques may not always be properly received by most of the devotees of each groups in each school, but there are certainly benefits in at least understanding the advantages of both practice.