Fundamental and technical Analysis

Fundamental and Technical Analysis

Fundamental and Technical Analysis are two faces of a coin. Fundamental analysis is a method of finding the value of the company by finding its intrinsic value. Most company’s stocks are valued for the business’s value. It includes assets under business management, growth potential, cash flow, intellectual property. It also includes anything that can add value to the company.

Principal of Fndamental analysis

Fundamental analysis focuses on making decisions based on when to buy and sell a stock. It is based on the variance between the current stock price and the total value of the company. A fundamental investor wants the best price on the value of a company assuming the value of the company will grow over time and hence his investment will also appreciate with time.

Perspective of Fundamental Investor

A fundamental investor buys a stock/company with high potential future growth. In the current market conditions, the market growth is not priced accurately. An Investor looks to buy a Blue-chip company at a great price when the price of the stock is lower than its intrinsic value. 

The goal of the fundamental investor is to project the sales and earnings trend of a company/stock to see the future price versus its current price. Fundamental analysis can be used in most financial markets like

  • Currencies
  • Real estate
  • Commodities
  • Stocks
  • and precious metals

Most of them, have some kind of underlying fundamental value. Anything that affects the intrinsic value of the company can be studied under the fundamental analysis.

The Perspective of Fundamental Analyst

The fundamental analyst will look at companies/stocks the same way as he would evaluate any businesses for value, price, growth, and cash flow. Fundamental analysis measures entries based on value rather than price and the exit points are based on the fundamentals like PE ratio, Earnings, sales, balance sheets, etc.

Fundamental and technical Analysis

Technical Analysis

Technical analysis on other hand focuses primarily on price action and volume. The best use of technical analysis (speculation) isn’t to try to predict the price in the future, but to find the path of least resistance, evaluate the probabilities of what will happen next, and identify a price level for entry/exit with a good risk/reward ratio. 

Price action is used as an indicator for traders and investors. It helps us to analyzed using price levels in the past. It helps us to determine how the price will act when the price will come to the same levels.

Technical indicators help us to measure and quantify trends, find overbought/oversold conditions, study momentum, deviations from the mean, divergences, and trading ranges. There are all kinds of indicators to enhance your knowledge and help you make educated decisions. My favorite is Volume profile, Bollinger bands, and market profile.

Perspective of Fundamental Analyst

Technical analysts can use different types of charts as well to add more visual dimensions to price action like bar charts, candlesticks, line charts, linear charts, and volume charts. 

Technical trading primarily focuses on the price action in chart patterns, support and resistance levels, trends, and volume patterns on a chart to identify the market or stock movement and also to create signals for both trade entries and exits on a chart.  

Goal of Tecnical Analyst

The goal of a technical trader is to create a price action trading system with a defined edge that helps with getting more wins than losses. There is no trading system in the world that can give you 100% accuracy and if someone says so they are lying to you. we can accomplish a win rate through Profitability. As long as your losses are small or you have a good risk/reward ratio your trading will eventually improve and you will see positive results.

Technical analysis doesn’t consider the fundamentals of stock rather it focuses on the price and volume the stock is trading at. However, fundamental analysis can still be used. Usually, good stocks have more liquidity and hence they are more feasible to trade.

What to Choose Fundamental and Technical Analysis?

A trader or investor can choose to focus on either technical analysis or fundamentals as they both have strengths in their own domains or choose a combination of them both( Which in my personal opinion is best).

Fundamentals analysis of a company tell you what to buy and Technical analysis tell you when to buy or sell.

In a nutshell Stock market is a game of demand and supply which can be studied by either fundamental like reading about businesses to make informed investment decisions (Fundamental analysis) or by studying the price and volume to make day/swing or long term trades(technical analysis).

Fundamentals = Analyze Current and future value.

Price = Analyze current buying and selling reality.

Volume = Current and past amount of interest in the security

“Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.”-Warren buffet

Contact The Prolific Trader

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