Fundamental Analysis vs Technical Analysis

Though one is not inherently/genetically better than other, I do believe that in terms of efficiency and real-time information, Technical Analysis certainly has an advantage over Fundamental Analysis. In this post, I will try to break down the Pros and Cons of both Technical Analysis and Fundamental Analysis, thus giving the reader a better idea of which system of analysis best suits their investment goals.

Fundamental Analysis:

Investment Horizon - Long Term (>1 Year)

Pros:

1) Lots of Information

In trading, the more information you have, the more chances of the trade working out. Fundamental Analysis is exactly what the name suggests: The study of the Core Fundamentals of not just the Company you’re planning to invest in, but the Sector/Sectors that affect the company, the macroeconomic variables such as Unemployment Rate, GDP, Market Sentiment, etc… Basically you are trying to analyze whether the company can Sustain Itself and Grow, given the current and future (projected) economic conditions.

2) On a long enough timeline, Fundamental Analysis always wins, because no matter how high (or low) a stock price goes, it will eventually revert back to its Core Fundamentals.

3) Fundamental Analysis is a more realistic approach towards trading.

Cons:

1) Not suitable for short term investors.

2) Time Consuming and Complicated.

3) Expensive.

4) Fundamentals Change. Constantly.

Technical Analysis:

Investment Horizon - Short-Term

Pros:

1) Real-Time.

The Price of a financial instrument discounts (factors in) all available information at a given point of time. What that means is, unless you have insider information, the current price of the stock is the most accurate (based on Micro and Macro Fundamentals). So even if you don’t know a thing about Fundamental Analysis, you can just look at a stock’s chart (price), and make an educated guess as to WTF is really going on with the company.

2) More Visual.

Unlike Fundamental Analysis, where you’ve got a lot of ratios and mathematical BS, Technical Analysis is more visual and graphically shows the current sentiment of all the market participants trading that stock/financial instrument. So, when you see a lot of RED (Bars/Candles) on a stock’s chart, you know that the current sentiment in that market is Bearish, and that there is some news or event, that is causing this bearishness. You don’t need to know what that news/event is, because since the Price discounts all the available information at a given point of time, one look at the chart and you know something BAD is going on. That is certainly one of the major advantages of technical analysis.

3) More Efficient and Accurate when it comes to entering and exiting a trade.

4) Mass Effect/Herd Mentality.

Almost 100% of the market participants use Technical Analysis, so you know that everyone is looking at the same price levels, trend-lines, moving averages, etc… hence, everyone will act a certain way when a stock’s price approaches those price levels. Mass Effect/Herd Mentality.

Cons:

1) Not always accurate.

2) Unlike Fundamental Analysis, LUCK (Timing) is an important component of Technical Analysis.

Conclusion:

Use Both, Fundamental and Technical Analysis, when making trading decisions.

The following two tabs change content below.

Wall Street Fool

Wall Street Fool provides unbiased real-time market analysis and commentary for Stocks, Bonds, Futures, Forex, Fixed Income, and Derivatives markets.

Latest posts by Wall Street Fool (see all)

Share

About Wall Street Fool

Wall Street Fool provides unbiased real-time market analysis and commentary for Stocks, Bonds, Futures, Forex, Fixed Income, and Derivatives markets.
This entry was posted in Observations, Random, Stocks and tagged , , , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.