Fundamental & Technical Analysis Philosophy
1) Fundamental Analysis Philosophy:
What Is It?
Fundamental analysis is nothing more than determining the actual value of the stock (or any other asset) relying on real world evidence. This refers to digging deep into the way a business makes money, the ownership of the business as well as the level of debt and industry, and the economy in general.
What Does It Assume?
The major assumption is that any given stock has an intrinsic value, in other words, its true worth, and the market price might not reflect the true value at all times. However, as time passes, the market will see the light of day and the price will ultimately be trading in that actual price.
Goal:
In order to identify under-priced stocks (good companies selling cheap) or overpriced stocks (bad companies selling at high prices) and make prudent and long term investment decisions.
Data Used:
- Company financial reports (like income statement, balance sheet, cash flow)
- Industry performance
- Economic indicators (interest rates, inflation, GDP, etc.)
Common Tools and Ratios
- P/E Ratio (Price to Earnings)
- EPS (Earnings Per Share)
- ROE (Return on Equity)
- Debt-to-Equity Ratio
Typical Time Frame:
Long-term investing (months or years)
2) Technical Analysis Philosophy:
What Is It?
Technical analysis is nothing but analysis of charts and price patterns with an intent of forecasting what could possibly occur next in the market. It does not pay much attention to what the company does or how much money it earns. It does not however, look at the movement of the stock price and the volume of trading.
What Does It Assume?
The point is that all the factors that may influence on the price of the stock (news, earnings, economy, etc.) have been already reflected in the price. Therefore, instead of doing their research on the company, analysts read price patterns and volume to know what the market is apt to do.
Goal:
To identify patterns and trends which would appear indicating the direction in which the price would move. This is usually geared towards making quick profits within a short period of time, may it be in days or weeks.
Data Used:
- Historical price data (open, close, high, low)
- Volume data (how many shares are traded)
Common Tools and Indicators:
- Moving Averages
- RSI (Relative Strength Index)
- MACD (Moving Average Convergence Divergence)
- Support and Resistance levels
- Candlestick patterns
Typical Time Frame:
Short-term trading (days, weeks, sometimes hours)
Key Differences Between Fundamental and Technical Analysis
| Feature | Fundamental Analysis | Technical Analysis |
| Focus | Company’s value and financial health | Stock price and volume patterns |
| Main Data Used | Financial statements, economy, industry trends | Price charts, volume, indicators |
| Belief | Price will eventually match the stock’s real value | Past price patterns help predict future movements |
| Time Frame | Long-term (investing) | Short-term (trading) |
| Goal | Find undervalued or overvalued stocks | Spot trading opportunities from market behavior |
| Approach | Research-driven, logical, value-focused | Chart-driven, behavior-focused |
Putting It All Together:
- Fundamental analysts act as long-term business partners in their mind: They might ask: Is this a company that I want to own in 5-10 years?
- Technical analysts are not futurists, they are traders: the current market is telling me something now about the current price trend, “Where is this price going?”
Many Traders Use Both
Highly effective investors and traders mix the two approaches. For example:
- Select good companies using the fundamental analysis.
- Decide when to buy or sell at the right time through the use of technical analysis.
In conclusion, fundamental analysis focuses on a stock’s true value for long-term investing, while technical analysis looks at price patterns for short-term trading. Using both can lead to better investment decisions.