by Amanda Harvey
Technical analysis vs fundamental analysis and the merits of each is a long-standing debate. There are investors who refuse to give any credibility to technical analysis, and make decisions solely based on studying the structure of the company in which stocks are offered. On the other hand, there are investors who completely disregard the innate value of the company, and make their trading choices totally on their prediction of market movement. A third approach to the choice between technical analysis vs fundamental analysis is to implement a combination of both.
The use of both technical and fundamental analysis is arguably the most balanced and, therefore, effective approach to trading. Many traders will conduct fundamental analysis first, to gain an understanding of whether a company offers a viable investment opportunity. They will then use technical analysis to help determine the best possible time to execute their entry into and exit from the investment that they have decided to make as a result of their fundamental analysis.
Benefits of Technical Analysis vs Fundamental Analysis
There are certain situations when opting for technical analysis rather than fundamental analysis can be beneficial. This is especially the case for short-term trading, where a trader is seeking to make a profit by following the trend of a market price movement.
The stocks in a fundamentally viable company may experience price movements that have little relationship to their innate value. These price movements may be a result of events occurring in the news, conditions in the market, or economic reports. These factors may not have much effect on the long-term value of the stocks, but they may have a significant result on short-term price movement. By using technical analysis to identify this movement, a trader can benefit from a short-term price movement in any direction, regardless of the long-term value of the underlying asset.
It is also significant to note that the stocks in a fundamentally viable company do not always reflect this viability at all times. It is generally the case that the stocks in a solidly operated company will eventually reflect the value of the company, however, this may take some time to occur. For a short-term investor, technical analysis can enable them to profit from the ups and downs that the price experiences, rather than waiting for the longer-term increase that is indicated by fundamental analysis.
Downsides of Technical Analysis vs Fundamental Analysis
When deciding whether or not to implement technical analysis vs fundamental analysis, there are some shortfalls to technical analysis that an investor should consider.
Technical analysis is not failsafe. There are always going to be times the charts and indicators predict that a price will move by an expected amount in a certain direction, and then it doesn’t. While indicators and analysis can be used with reasonable accuracy in determining a probable outcome, the market will always contain an element of unpredictability.
Fundamental analysis provides more documented evidence that a company is structurally sound, and in most cases, this stability will eventually be reflected by increased stock prices. The question is how long before this gain will be realized, but for long-term investors, fundamental analysis offers a solid basis for making investment decisions.
When assessing the pros and cons of technical analysis vs fundamental analysis, it is important to remember that these two forms of analysis need not be mutually exclusive. While technical analysis often offers opportunities to benefit from short-term price movements in the market, choosing stocks that are also validated by strong fundamental analysis can provide a winning trading formula. There is no single method that suits the personality and strategy of every trader, and so learning how to use and combine the different styles of analysis in a way that works for the individual is a key to investing success.