Technical Analysis, Fundamental Analysis. What are these?

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If you’ve ever tried to learn about investing in the stock markets, you would have probably come across these two terms. Now what do they exactly mean? It would take thousands of words and examples to explain both terms, but I am going to describe both terms briefly here.

 

Technical Analysis

Technical Analysis is the reading of charts and using various different indicators to evaluate a stock. Analyzing the data gathered from these tools, you will make a decision about the future price movement of a stock.

The focus

For TA, we only focus on the charts. We are not concerned about the company’s history or the products and services it provides. We make decisions largely based on the data on the charts and the price movement of the stock. The timeframe for technical analysis can range from as short as a day trader, to as long as a few months or a few years. You can set up your investing strategy based on TA to the timeframe you prefer.

In Technical Analysis you will use a variety of different tools and indicators. For example trends, moving averages and support and resistance. Some indicators are MACD, average true range and money flow index.

The issue

One problem I feel with TA is, “It is more of an Art and not a Science.” This means, the data you get from TA is based on each individual’s understanding. Sometimes there are no exact levels and two people looking at the same chart can draw different conclusions from it using different reasons.

 

Fundamental Analysis

Fundamental Analysis is the studying of numbers and a company’s strengths to determine it’s worth. You will make your decision after looking at the company’s annual report and evaluating the competitive advantages it may have.

The focus

For FA, we focus on the numbers. We are concerned about the company’s history and it’s product and services. Our decisions will be made after reviewing the balance sheet and cash flow and income statements. The timeframe for FA is normally for the long term as investors will buy a company that they feel is undervalued or will experience large growth in the future.

In Fundamental Analysis, you will review the company’s annual report to look at some key figures. Examples include earnings, debt and cash flow. You will want to make sure that the key figures are growing from year to year. You will also look at ratios like PE, EPS and PEG. Some investors will also evaluate a company’s management and the competitive advantages it enjoys over its competitors before using their formula to determine the value of a company.

The issue

One problem I find with FA is, the final value is only as good as the numbers you put it. There is a saying, “Garbage in, garbage out.” If the numbers you use in your formulas are wrong, the final value you get will be even “more wrong”. This is because the rates in the calculations are variables, it is up to the investor to decide what these numbers should be.

 

My opinion, which do I prefer?tafa

TA? Nope. FA? Nope. I don’t have a preference. They both have their strengths and weaknesses. None is superior than the other because it really depends on the individual investor. What kind of returns and timeframe that he or she is looking for.

Anyway, who says you have to pick one? Why can’t you combine both of them to get a much more robust strategy? Sure, it’ll be a lot more work but like Warren Buffett once said, “Investing is simple, but not easy.” Anything worth having in life will take a lot of effort. If you really want something, you’re going to have to work for it. Be it investing or any other areas in life.

 

Let me know in the comments if you prefer TA or FA. Or do you have any other better strategy that you use? I also have an upcoming course on TA where you can take a look here. Feel free to share this post and thanks for reading!

 

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  1. Pingback: What kind of investor are you? – The Tireless Worker

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