The basics of fundamental or technical analysis
The fundamental analysis means looking at the financial health of the company, its profit record, sales, and dividend payment ratio. However, technical analysis concentrates more on mathematical techniques and charting to check the price movements of stocks.
The power of mixing the fundamental analysis vs technical analysis
For stock market analysis, both fundamental and technical analysis provide valuable insights. But, let’s be real; some specific technical indicators work best for some traders as they can change their investment game.
Even though you know that fundamental analysis can be better, some unexpected news can always drive prices up or down.
So, when you use the power of two analyses, it is important to check the effectiveness and reliability of every method.
- You may run a series of backtests across different timeframes on both strategies. This helps you notice how profitable and accurate they are.
- The technical analysis may be slightly more profitable. But, you must note that nothing can predict the stock’s future.
- Use technical analysis to check the past stock price and other information of the company. Go with fundamental analysis for studying a company to check how successful it may be in the future.
Pros and cons of fundamental analysis
No one can overstate the importance of fundamental analysis in trading. But, it is crucial to know the pros and cons of this analysis.
Pros:
- The main benefit of fundamental analysis is that it helps investors identify the right stocks and avoid the wrong ones.
- With technical analysis, you can locate long-term trends and opportunities
- Technical analysis can be your guiding light in the stock world. When you have good stocks, it can help you find the best one.
- The best part of going for fundamental analysis is that even if your stock fails, you can quickly recover from it
Cons:
- When you use fundamental analysis, it can never guarantee that you will make a profit.
- Even if fundamental analysis can spot a business that is overvalued or undervalued, it cannot predict exactly when the stock price will start to move based on your investment.
- You cannot evaluate two sectors at the same time with fundamental analysis.
Pros and cons of technical analysis
Now that you know the advantages and disadvantages of fundamental analysis, let’s know the pros and cons of technical analysis too.
Pros:
- With technical analysis, it is possible to quickly identify trends in the market. This helps investors make better decisions.
- The technical indicators can guide you by giving entry and exit signals. So, you can know when an asset is oversold or overbought.
- You can limit your loss through technical analysis as it sets stop loss orders at critical levels of resistance or support.
- The best thing about technical analysis is that it helps traders ignore emotional decision-making.
Cons:
- Since technical analysis is very subjective, several traders can interpret the same chart differently.
- The technical analysis never considers fundamental factors like company news or economic data which raises questions about its accuracy.
- The technical analysis is not suitable for every market condition and fails to predict stocks accurately.
Which is better: Technical analysis and fundamental analysis?
There is no straightforward answer to this because it depends on the investors. Both come up with their advantages and disadvantages. You can go with fundamental analysis if you want to concentrate on long-term value. But, if you want to capture short-term price movements along with market sentiments, technical analysis is the best.
Conclusion
The debate between fundamental and technical analysis will go on. However, both can help make better investment decisions. But, you must be careful when making decisions since not every time they predict the price movements correctly.
