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The Trend Rider:
Technical vs. Fundamental Analysis
Chris Rowe
When we analyze a company, we use fundamental analysis. When we
analyze a stock, we use technical analysis.
A "trader," is more likely to use technical analysis because it is
known to more accurately assist in predicting the short term moves
of a stock.
A long term "investor" is more likely to use fundamental analysis
because it gives a clearer picture of the longer term potential of
the underlying company behind the ticker symbols of a stock. Both
forms of analysis are the study of trends and are only as good as
the individual who is interpreting them.
While you can closely follow and profit from current market trends,
fundamental analysis is equally as important as technical analysis.
For instance, I'll go long on a stock when I see that the bulls are
in control, and the volume is moving higher with the price of the
stock, but I position myself in the companies that have fundamental
strength that back up the price movement of the stock.
The two forms of analysis should act as two partners running a
profitable business. Together, the two are like swordsmen with their
backs to each other fighting a large group of enemies. One has to
trust that it can rely on the other to protect its back.
People often lose sight of the fact that there are over 10,000
stocks to choose from when deciding which to trade. It is important
not to settle for stocks that don't have the strength that we look
for, as long as we have the resources to get the ideas in front of
us that we would even consider trading.
Having strong criteria on both ends is critical, and if one of the
two is telling you that there is a red flag or a warning sign to
watch out for, you should have no problem with dropping a stock that
you believe is suspect. Consider stocks that have strong
fundamentals AND technical indicators, pitches that are thrown
directly over the plate.
Let's compare the difference between the two:
Investors typically use fundamental analysis to calculate what a
company's stock price should be doing. Traders typically use
technical analysis to draw conclusions as to what a stock will do
based on what the stock is currently doing. Fundamental analysis
takes a much more in-depth look at a company and the industry that
it is in. A fundamental analyst must have much more intimate
knowledge of an industry and of the story behind the underlying
company.
Whether this is an advantage or a disadvantage is up for debate and
has been for ages. The idea is that a fundamental analyst spends a
great deal of time "unwinding" a company's financials to get a clear
picture of where the company currently stands.
The fundamental analyst must first study all of the important
relevant factors that already exist. The next step in fundamental
analysis is to study the anticipated changes in the company, the
industry, and the overall economy to try to clarify the picture of
what will happen in the future.
Technical analysis is more superficial and is done mainly on the
notion that the story of the company is reflected on the stock
chart.
While the fundamental analyst studies the existing public
financials, the technician believes that if a company is poised to
take off, someone out there already knows it and is already acting
on it. When a large fund starts to act on knowledge of a company,
whether it be public or not, they tend to attempt to acquire a large
number of shares without making it very obvious that they know
something of value.
This is nearly an impossible task. The public record that the
technician studies is the chart, because everything that happens,
such as price movement as well as size of the trades, is recorded.
Since technical analysis is geared for traders as opposed to
investors, it is used to act swiftly without taking as much time as
fundamental analysis. So, the benefit for the technicians is that
they have one step to take. It's a much faster form of analysis
that gives them the edge that they need to act quickly. Their main
advantage is that they don't have to forecast their indicators like
fundamentalists do. For a technician, the indicators are the
forecast.
Both fundamental and technical analysis is helpful in painting a
more complete picture. The two should be used to complement one
another instead of versus one another. You can find red flags
telling you to get out of a stock before the rest of the herd by
using both forms of analysis.
Using fundamental analysis, several warning signs can be found in
the financials if you look closely enough. Sometimes they are
warning signs that sophisticated investors will have an easier time
seeing, and other times the signs are more obvious to the layman,
such as a company that is taking on way too much debt.
Using Technical analysis however, is a good way to spot red flags
that a stock might trade lower, based on news that has not yet been
made public. Let's face it; the stock market is not always fair.
Oftentimes, someone knows something that will have a huge impact on
the price of a stock before the rest of the world knows about it.
This is where technical analysis can really give you the edge that
you need to save yourself from a loss.
It is for these reasons that we make sure that we use both forms of
analysis when investing our hard-earned money. On the fundamental
side, we put in hours, days, weeks, or months of research before
buying or selling a stock. But technically, sometimes we see
warning signs that tell us to sell for our protection. You worked
hard to get the money in the bank and then transferred into your
stock account. You should work just as hard, if not harder, to keep
it there.
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