Technical vs Fundamental Analysis, the Difference

I was thinking earlier today about how I have really begun to take this blog deeper and deeper into stock lingo, investor education, quizzes, stock contests, and the like. And, amongst all of this outstanding, entertaining, educational, and intellectual information I forgot to mention one important fact that every trader either knows or should know. The fact is this, everything analysis wise in the stock market will stem back to one of two forms: technical or fundamental.

Do you only read charts and look at volume trends and support or resistance lines? Well then you are very focused on technical analysis! Do you base your investment decisions on the last three years of earnings growth, considering debt and EPS (earnings per share) into the mix? Well then you are very focused on fundamental analysis!

So what are the major differences between the two? Let's do some comparisons:

  • Fundamental analysis has a core purpose to produce a value that an investor can then compare with the current stock price of a given company. That value then becomes a "buy, sell, hold" type rating. But technical analysis? There are no such things as buy, sell, and hold ratings.
  • Fundamental analysis will focus on the economy, typically macroeconomics to help determine intrinsic value. What that means in 101 terms is this, "hey, interest rates may be affected later this year, this will surely affect xxxxxxxxxxx". Technical analysis on the other hand does not care what the economy is up to. 10% Gap ups are more important than interest rate hikes and war.
  • Fundamental analysis focuses on financial ratios and numbers such as debt, EPS, cash flow forecasts, etc. where as technical analysis focuses on historical price movements to determine possible short term or long term moves to come.

And really those are the main difference that can sum up and divide technical and fundamental analysis! So, now you can ask yourselves, "which am I, do I focus more so on technical or fundamental?" "Should I try researching more into the other?"

Most investors will probably tell you that a combination of both technical and fundamental analysis is the best way to go. But if you ask someone like Warren Buffett what he thinks, and well, you you get the point!

(By the way, did you enjoy this post? If so, subscribe to the feed alright? We don't want you out of the loop anymore!)

Comments

  1. Posted by Wolf Stone on May 10, 2007 at 1:02 pm

    while i like your comparisons between fundamental and technical analysis i think you could have outlined the rebuttal points of technical analysis a little more thoroughly (like what you have done with fundamental analysis).

Trackbacks

  1. [...] technical analysis you can make trades based off of support or resistance points fairly easily. The thinking behind [...]

  2. [...] today of three posts, first I am going to explain the Relative Strength Index (RSI) as a form of technical analysis, and give an example of how it works which is this post. Then, I am going to explain Moving Average [...]

  3. [...] shares is pretty important, especially when conducting fundamental analysis. Following this post I am going to explain Earnings Per Share (EPS), and well, you can’t [...]

  4. [...] Per Share (EPS) is one of the most widely used statistics of fundamental analysis. Did you know that Earnings Per Share is arguably the single most important variable in determining [...]

  5. [...] we continue to dig deeper into the art of technical analysis, I get to introduce you guys to more and more patterns to find on stock charts. The pattern we will [...]

  6. [...] was doing some technical analysis yesterday and came across a chart of the Chicago Mercantile Exchange (CME). While looking at it I [...]

  7. [...] post will explain what ascending triangles are in relation to technical analysis with stock charts, and then illustrate and explain to use them to trade [...]

  8. [...] What is Technical Analysis [...]

  9. [...] The following technical analysis implies the concepts [...]

  10. [...] What is Technical Analysis [...]

  11. [...] is a fantastic resource for attaining stock charts on any given stock, which makes conducting technical analysis pretty darn easy. Stockcharts.com has another advantage which has helped this spread like wildfire, [...]

  12. [...] O’Neil uses a combination of both fundamental and technical analysis for choosing his best stock picks. He relies on strong companies with great past history earnings [...]

  13. [...] on fundamentals for your stock research, than go out on margin only with that strategy. To pull out Technical Analysis for Dummies and start day trading on 400% margin is suicide. Go play the $1 lottery instead and try [...]

  14. [...] the difference between both technical and fundamental analysis. I covered and compared both technical analysis and fundamental analysis before on this blog, and the summary is really [...]

  15. [...] up a stock chart to perform this simple technical analysis is actually quite easy. There are a few places to gain access to free stock charts: [...]

  16. [...] chart education is very important for investors that want to perform technical analysis. By understanding price patterns traders have an edge at predicting where the stock is going [...]