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Fundamental Analysis vs Technical Analysis

One of the questions that most new traders ask is the difference between fundamental analysis and Technical analysis. In fact, it is hard to come by a stock trading book that does not try to explain the difference.

The debate may have started due to the need for a trader to find a method to pick the stocks that they need to trade. What is the criterion to use before you buy or sell stocks? Do you use information from your friends, statistical analysis, and company information? Why your stock picking criterion is better than any other is?

Fundamental analysis and Technical analysis are the two main schools of thought in picking stocks. This has led to heated debates from traders who insist they are either Fundamental analysts or Technical analysts. Each insists that theirs is the better trading methodology. Then there are those that think that it is best to use both methods to make a trading decision.

Fundamental analysts look at economic factors affecting a stock. On the other hand, technical analysts will rely on the price movements of the stocks. As such, they may use different tools to get to their conclusions.

Time Horizon

Fundamental analysts will take a relatively long-term approach to stock trading than Technical analysts.

For example, financial statements such as earnings reports may change quarterly at the very least. On the other hand, price movements, used by technical traders, can be weekly, daily or even to the minute. The technical analyst believes that the value of the company can change at any time. The fundamental trader on the other hand believes that the company value will take a long time to be reflected in the market.

Financial Statements vs. Charting

Probably the most common icon for technical traders are all the charts that they have to read. The technical trader believes that the current stock price is a true reflection of the value of the company. As such, they believe that all the information they need on a stock can be gained from the charts.

The fundamental trader on the other hand will try to determine the company value by looking at financial statements. This involves looking at balance sheets, income statements and cash flow statements and comparing them to previous periods.

Investors vs. Traders

Technical traders have different goals from fundamental traders. The fundamental trader is willing to hold on to a stock for a long period, as they believe the assets will increase in value over time.

The technical trader on the other hand, is more interested in making a profit in as short a time as possible.

Of course, many fundamental traders do not take technical trading seriously and vice versa. Stock traders have proven to be profitable using either of the methods. This in turn has led to another group of traders who use both techniques to confirm their trading.