Technical analysis versus fundamental analysis depends on the context. They are basically two philosophies in financial markets and can be used for different purposes.
Although both approaches differ in a lot of ways, both schools of thought can be utilized to make better investments.
Technical analysis is an investigation into the price movement of a security and utilizing the data to speculate on future price movements.
Unlike a technical analysis, a fundamental analysis looks at the economic factors that can influence securities.
So what are the key differences?
If you strip it down to the bare minimum, the technical approach is a study of securities with charts.
The fundamental approach, on the other hand, looks at financial statements. A fundamental analyst will try to determine the intrinsic value of a company by taking a look at income statements, cash flow statements, and the balance sheet.
With a fundamental analysis, it’s fairly easier to make a decision as its seen as a good investment if the stock is trading below its intrinsic value. But technical traders don’t believe this is necessary as its all accounted for in the stock’s price.
They believe that the important information can only be found in charts. It’s also a lot faster to study charts than perform a fundamental analysis. Sometimes it can take weeks to study data that covers a number of years.
With a fundamental analyst’s approach, it can take a long time for the stock price to rise and match the estimated intrinsic value. This is basically value investing with the assumption that the current market price is wrong. But the belief is that the market value will correct itself in the long run.
Different goals dictate the different approaches, technical analysis always has a short-term goal while fundamental analysis is long-term in nature. Usually, a technical approach is used to trade whereas a fundamental approach is used to invest in stocks.
Traders buy stocks to sell to someone else at a higher price quickly whereas investors buy and wait for the price to rise over time.
Although both approaches have many critics, most folks at Wall Street will follow the fundamental analysis. But technical analysis has its roots in academic theory that state that the market price is always correct.
It’s difficult to say that one approach is better than the other. However, history suggests that a combination of the two is the best way forward.