Technical vs Fundamental analysis: Which is right for you?

As a professional investor, there are two primary investment strategies, which are technical and fundamental analysis. In reality, many professional investors will amalgamate the 2 to create their perfect investment style. This article will examine the difference between technical and fundamental analysis and how they appeal to different investors.

 

Understanding technical analysis

 

Before we look at technical analysis in great detail, there are three golden rules:-

 

· Markets discount everything (based on time)

· Prices move in trends

· History does repeat itself

 

This is the basis of technical analysis, which can be best described in one word; momentum. Whether you have noticed a build-up of momentum, continued momentum or fading momentum, these are the critical signs for professional investors.

 

The key investment tools around technical analysis depend upon the following:-

 

· Indicators

· Oscillators

· Moving averages

· Relative strength

 

Swing traders will look for overbought and oversold positions, relative strength, and take a contrarian view so that they can bank a profit when the price snaps back. Short-term traders, but with a slightly longer investment horizon, will look at moving averages and indicators to identify a turning point in the share price.

 

Understanding fundamental analysis

 

The vast majority of professional investors will have an understanding of fundamental analysis, which includes:-

 

· Balance sheets

· Cash flow

· Financial health

· Income statements

· Prospects for the future

 

When report and accounts are published, the basis of these accounts is historical, and they will be months out of date when released. Therefore, those who invest based on fundamentals are likely to take a greater interest in the prospects for the future, research notes and the general sector trend.

 

However, it is also essential to consider macroeconomics as this will impact the wider business arena and specific sectors. For example, the technology sector can be flying high one moment, and when interest rates rise, the economy turns, and consumer spending comes under pressure, this is often the first sector to be hit.

 

So, when looking at any sector, it is crucial to consider the wider economic situation. Even though the industry you are focusing on may still have relative strength, if the whole market downturns, it can be challenging to make money.

 

The key differences between technical and fundamental analysis

 

You will likely receive various answers if you speak to 10 different people about the benefits of technical and fundamental analysis. In isolation, using either of the techniques can be dangerous, so whether you focus on one or the other, you should also be aware of the broader picture.

 

Some of the key differences include:-

 

· Technical analysis is based on the now

· Fundamental analysis has its roots in the past, although it does look forward

· Using technical analysis, there can be a time lag before buy/sell signals emerge

· Technical analysis assesses prices, which can include public and inside information

· Fundamental analysis tends to be a more long-term investment strategy

· You may experience false buy/sell signals with trend analysis

· Short-term graphs, i.e. trend analysis, can be impacted by one-off large buy/sell orders

 

As a professional investor or someone monitoring the market, technical analysis appears to be based on price movements compared to the past. In contrast, fundamental analysis is based on medium to long-term market, investor and analyst opinions. In reality, it is slightly different!

 

Stock exchanges or information exchanges?

 

If you see the stock exchange as not the home for stocks and shares but a central point where different opinions meet, an information exchange, this is a more appropriate concept. You have buy orders, sell orders, analysts with positive, neutral and negative views and the same with investors. All this information is digested into the central information exchange, creating live prices, based on real-time data.

 

Summary

 

As mentioned above, most professional investors will take in an element of technical analysis and fundamental analysis, as well as a glance at the macroeconomics, before deciding their next move. Technical analysis is more beneficial for short-term traders although it can indicate long-term trends. On the other hand, fundamental analysis is more long-term, often ignoring any short-term bumps in the road. So, what is your current investment strategy based upon?

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