What are some basic differences between technical analysis and fundamental analysis?
Posted on April 8th, 2010 in Technical Analysis | 4 Comments »
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I was told to not follow a technical analysis because it just follows graphs and charts that chart trends. But, I don’t know the difference between these two.
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4 Responses
Fundamental analysis involves studying statistics and news about the company and about the economy in general. It is worthless because company numbers are frequently cooked and they only come out once a quarter. Government statistics usually have a huge lag time, sometimes months after the time period in question.
Technical analysis looks at market information (price and volume) only. This is where true information is. Buy things that are going up and sell things that are going down.
Example: A CEO announces that profits will be up 20%. Fundamental investors will buy. At the end of the year, the CEO has all kinds of reasons why this didn’t happen and the stock drops and fundamental investors got screwed. In reality, the CEO was pumping up the price so his friends and family could bail out. This selling forced the price down and showed up on the charts, so technical investors avoided the dog, or even made money shorting the stock.
Both of the above are very good answers.
But to your second sentence, you must use both forms of analysis to make an informed decision. That said most fundamentals as mentioned earlier are suspect due to rampant govt intervention
Assuming you know what analysis is, rather than need some, I’ll try to keep it short. Each form of analysis has different sources of pertinent information, and how that information will affect a company.
Fundamentalists look at the company from the inside out. Assets, earnings, goodwill, products, markets, etc., all looked at to get an overall picture of corporate health and feasability. As these values change so should the underlying stock price.
Technicians stipulate that all financial information has been disclosed and therefore the fundamental value is present at all times. So, techs look at price and volume movements within the underlying stock price to arrive at a price decision point.
That’s it, as simply as I can put it. There are arguments for both schools of thought. I use both and neither. I like sound fundamentals, with a good chart pattern. Sometimes though I go completely against both.
Fundamental analysis is all about the companies fundamentals… (aka Net Earnings and growth potential). Technical analysis is all about charting trends that may or may not have anything to do with fundamentals…
In short… Most traders are moving toward technical analysis right now simply because of the massive distortions in monetary liquidity. Meaning, when you add $4 Trillion in "liquidity", the Federal Reserve ends up creating a unnatural event that has little to do with underlying fundamentals. In the longterm, they will make the situation worse, but their hope right now is to try to stabilize the system..
Keep in mind that our monetary system is for the most part a massive Ponzi scheme… Meaning, economic collapse is very easy to occur when there is no real monetary distinction between money and debt…