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!

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  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).


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