Technical Analysis vs. Fundamental Analysis: Trading Strategy Differences

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Contributor, Benzinga
January 10, 2024

When evaluating the stock market, investors must consider technical analysis vs. fundamental analysis. Though these two methods represent the two main schools of thought regarding the stock market, they couldn’t be more different. Understanding the difference between technical analysis vs fundamental analysis is crucial when making investment decisions. Here’s how to choose the one that’s right for you.

What Is Technical Analysis?

Technical analysis relies on statistics to help predict how a stock might perform in the future. Thus, technical analysis focuses on a stock's past performance, referring to data such as market price movements, volume and investor behavior.

Considerations

While it sounds advanced, even beginner traders can perform technical analysis. Here are some key considerations:

  • Identify what stock/security to analyze
  • Determine the trend (upward, downward, constant)
  • Choose a strategy that matches the trend
  • Select a trading account and learn the tools and interface
  • Practice with “paper trades” that simulate real-world trades

Many online brokerage accounts can supply you with tools and resources to help you analyze data and market trends. The more you get used to using these tools, the better equipped you’ll be to perform technical analysis for market price.

Example of Technical Analysis

Once you become more familiar with technical analysis, you’ll be able to match your investment strategy to pricing trends.

Here’s an example of technical analysis in real life: imagine that you wish to buy stock in Company X. You notice Company X is experiencing an upward price trajectory. This market trend leads you to believe the share price movement will continue to rise.

Consequently, you might consider taking a long position, which will help you if the stock price increases.

Pros

Technical analysis can offer many potential advantages because it

  • Relies on direct data rather than knowledge of market mechanics
  • Can help suggest possible trends to inform your strategies
  • May provide possible clear entry and exit points for investors
  • Helps traders set clear criteria for stop-loss orders

These potential advantages make technical analysis popular for many for day traders since day trading requires investors to make quick decisions about which stocks to invest in and how to manage the positions.

Cons

Technical analysis does come with limitations.

  • Past prices aren’t always indicative of future results.
  • Some data can be open to interpretation. There can be conflicting and confusing signals.
  • Technical analysis ignores information used in fundamental analysis.
  • Stock prices might drop for stop-loss orders regardless of a clear price trend.

These limitations don’t negate the potential value of technical analysis. After all, no one can predict the future. Investors should exercise the usual precautions to manage risk when making stock purchases. Keep in mind, an investor shouldn’t buy or sell based solely on any indicator.

What Is Fundamental Analysis?

While technical analysis relies on statistical data, fundamental analysis relies on a company’s intrinsic value to determine the viability of its stock.

This type of analysis requires a holistic view of the company that accounts for changes facing the U.S. economy, the industry and the company itself. It calls for more specialized financial knowledge than price movement data-driven technical analysis.

Considerations

Fundamental analysis requires a bit more research on the individual companies than technical analysis but can be easily accomplished by doing the following:

  • Study the company’s history
  • Evaluate the company’s revenue
  • Analyze the company’s earnings per share (EPS)
  • Look at the price/earnings (P/E) ratio
  • Check the company balance sheet
  • Research the company’s debt
  • Compare the company to its competitors

You might start by searching through the SEC’s EDGAR database to evaluate a company's history and performance. This practice also demonstrates a key difference between technical analysis vs. fundamental analysis: fundamental analysis looks at a broader section of financial data, while technical analysis focuses on price trends.

Example of Fundamental Analysis

Here’s a quick example of fundamental analysis: let’s say you’re interested in buying stock in Company Y, but you’re not sure whether it’s a good long-range plan. You spend some time reading industry publications and looking at the company’s financial data to make an informed decision.

After completing your research, you learn that the company demonstrated strong resilience in the post-pandemic economy and that the industry as a whole is expected to flourish in the next decade. You conclude that Company Y appears like a sound investment with attractive stock price and make your purchase accordingly.

Pros

Fundamental analysis can help you in several distinct ways. For example, it:

  • Can help identify long-term trends
  • Can help identify undervalued stocks
  • Develops your understanding of business/economics

Unlike technical analysis, which mostly relies on short-term data, fundamental analysis can help you better understand a company’s long-term trajectory.

Cons

Fundamental analysis also has its limits, including:

  • It can be hard to stay objective.
  • Companies can “spin” their data to influence investors.
  • Industries can be influenced by untold numbers of factors.

There’s no clear winner when it comes to technical analysis vs. fundamental analysis; it just means investors need to understand the strengths and weaknesses of each method and manage risk accordingly. Technical analysis vs fundamental analysis plays a crucial role in making investment decisions.

Technical Analysis vs. Fundamental Analysis: Can You Use Both?

These two methods aren’t mutually exclusive. Investors can potentially use both fundamental and technical analysis to plan their trades.

For example, technical analysis might uncover an upward trend in a company’s price, while fundamental analysis reveals a strong company history and industry growth. When combined, these analytical methods can provide a comprehensive understanding of a company’s stock and help investors make informed buying and selling decisions. Understanding technical analysis vs fundamental analysis plays a crucial role in determining market trends and stock prices.

The Best Decisions Depend on the Best Data

Unlike gambling, which hinges on chance alone, stock market investing is based on careful, diligent research. Both fundamental and technical analysis allow you to make more informed decisions about your stock portfolio to help you become a wiser, more confident investor.

Frequently Asked Questions

Q

Which is easier: fundamental analysis or technical analysis?

A

Which method is easier: fundamental analysis or technical analysis? While neither method is necessarily “easy,” technical analysis relies on a snapshot of statistical trends, which for some can be simpler than the industry and company research associated with fundamental analysis.

Q

Do traders need fundamental analysis?

A

Is it imperative for traders to employ fundamental analysis? Not necessarily, though it can provide important data for long-term investments and may help better identify value stocks.

Q

Which analysis is best for the stock market?

A

Does one type of analysis fare better in the stock market? There may not be a “best” approach, and investors might consider using both methods to obtain a holistic understanding of a stock’s value.

About Sarah Edwards

Sarah Edwards is a finance writer passionate about helping people learn more about what’s needed to achieve their financial goals. She has nearly a decade of writing experience focused on budgeting, investment strategies, retirement and industry trends. Her work has been published on NerdWallet and FinImpact.