What is Technical Analysis?
Technical analysis is what traders use to predict short term trend of a stock price. They use stock charts and technical indicators to try buy stocks at a low price and sell it higher (buying at support) or buy it at a high price and sell it for a higher price (buying when a stock break resistance).
What is Fundamental Analysis?
Fundamental analysis is what long term investors use to find value or growth stocks and invest in the company. They study a company’s balance sheet, earnings report, analyze their competitors and much more.
Which is better? Technical analysis or fundamental analysis?
I know traders who make money using technical analysis and investor who profit from using fundamental analysis. The best way for you to decide is try to learn both and see which one works the best for you. You can also use a combination of fundamental analysis and technical analysis to trade. For example, you use fundamental analysis to invest in a company, and use technical analysis to take profit from the short term stock price fluctuation. There are both pros and cons about technical analysis and fundamental analysis.
Technical analysis Pros and Cons
Pros – a) You spend less time doing research on stocks
b) You will find a lot more stocks to trade
c) Lose less during bear markets because technical analysis requires you to have a narrower stop loss and this will save you.
d) technical analysis works for any market such as forex, futures, options, and stock market.
Cons – a) You need to learn to be more discipline in order to trade successfully
b) You need to constantly look for stocks to trade
c) Sometimes, you make less profit with technical analysis during bull markets. The reason is some traders exit a trade too early when they believe a stock is over bought.
Fundamental analysis Pros and Cons
Pros – a) You can have a much loose discipline than the day trader or swing traders.
b) You don’t need to constantly look for stocks to trade because you will hold a stock for a long time after you buy it.
c) Sometimes, you make more profits with fundamental analysis when you find a killer stock during bull markets.
Cons – a) You will need to spend a lot more time researching each stock you buy
b) You will find fewer stocks to trade
c) Lose more during bear markets because fundamental analysis requires you to hold a stock much longer and therefore the stop loss is bigger.
d) Fundamental analysis only works for the stock market. You need to study about currency and other thing if you decide to trade forex.
My Opinion
I have never use fundamental analysis solely to invest in companies so I can’t really say they are bad or good. On the other hand, technical analysis is working pretty well for me ever since I started trading and this is the method I recommend beginners to learn if you don’t have a finance or accounting degree. The reason is it is much harder to learn fundamental analysis than technical analysis and I believe it is more profitable to use technical analysis to trade the stock market. Fundamental analysis is only more profitable than technical analysis when you find killer stocks like AOL and CSCO in the 90’s or Microsoft in the 80’s and hold them for 5-10 years. However, there aren’t that many companies like Microsoft or CSCO. Fundamental analysis will lose more money in a bear market. Imagine if you were to hold stocks like Citigroup, Bear Stearn, Lehman Brothers, AIG, Fannie Mae, Freddie Mac and so on 2 years ago. You may lose all or 90% of your money if you were using fundamental analysis on those stocks at that time period. On the hand, using technical analysis allows to exit with a narrow lost because you have a smaller stop loss and reacts to the short term price fluctuation more quickly.
