Oct
23
2010

Technical or Fundamental Analysis?

An article by Varun Walia

There are many reasons which can prove that technical analysis is better and superior than fundamental analysis. Here is a comparison between technical and fundamental analysis. Technical analysis focuses on the study about market action, while fundamental analysis focuses on supply and demand forces that guide trend movements in the market.

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Strategies of technicians and fundamentalists

The main motive of fundamentalists is to know the basic value of stocks and every factor that affects price is being determined by them. A fundamentalist decides to sell the stock, when its intrinsic value is under the current price because in that case a stock becomes overpriced. Stocks should be purchased at the time when its price is less than the intrinsic value because at that time market is undervalued.

For technicians, reasons behind the market movements are least important but fundamentalists concentrate on the study of market movements. Technicians are of the view that the effect of all events that lead to change in price is being reflected by the price. Hence, studying price action is an essential step for them.

Technical and fundamental analysis both are important

Both technical and fundamental analysis has been used by most of the people for trading purpose. Many fundamentalists and technicians have basic idea about technical approach and fundamental approach, respectively. However, most of the people prefer to adopt one method.

Why to select technical analysis?

As technical analysis is adaptable and flexible, therefore technical rules can be implemented to every market, including stocks or futures. A technician has ability to handle many markets at one time and this has been considered a strong point because in each market one can handle big movements.

Technical rules can be used for swing trading, day trading and long-term trading. Only time of charts can be changed and all other rules are same. According to some people, short-term trading is the only trading where the use of technical analysis is perfect but this is not correct. The potency of technical analysis has proved weekly and monthly charts that refer to several years and with the help of this one can experience long-term trading. The slower pace of technical analysis is one of its major disadvantages.

Why to choose fundamental analysis?

In case of technical analysis, if a person knows the history of a stock, he can easily predict its future but if a new company enters stock market, one cannot predict its future because it does not have any past. So in that case, fundamental analysis can be helpful.

Conclusion

One can get the best returns in the stock market if the combination of both technical and fundamental analysis is used. The best way is to understand both the methods and then select one as a principle method and other as help.