Difference between Fundamental & Technical Analysis
- Fundamental analysis seeks to determine a future stock price by understanding and measuring the objective "value" of equity. In contrast the study of stock charts, known as technical analysis, is based on the belief that the past action of the market itself will determine the future course of prices.
- Technical analysts try to forecast short term shifts in supply and demand that will affect the market price of a security and economy related information as fundamentalists do.
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- Technical analysis is useful for only short term investors, while fundamental analysis is useful for long term investors.
- A fundamentalist believes that long term security values can be gauged by studying the main factors related to the firm, the industry and the economy. While on the other hand a technical analyst works on the premise that short term price movements can be predicted on the basis of price-volume study, chart patterns of individual stocks and other technical market indicators The above comparisons are given to better understand the role of each type of analysis, but that doesn’t mean that they are mutually exclusive and should be used in isolation only. Rather these two fields of analysis compliment each other and can be used together to achieve better results. One must go for a share which is fundamentally strong and then determine the timing of your buying or selling the shares on the basis of technical analysis. To understand this concept of using both these analysis together, let’s consider
the following example:
Say a stock named XYZ is available at a current market price of 100. By fundamental analysis you arrive at fair value of XYZ at 70, at which this stock would be considered as a good investment. Now suppose the stock started correcting after 2 months and came down to the price of 70. Now if you understand technical analysis as well then you won’t rush to buy the stock just because it has come down to 70. Rather you will do a quick technical analysis to check whether there is some more downside left in the stock or not. If the technical indicators suggest that there is some more momentum left in the stock on the negative side then you would wait for some more time and only start buying the stock at a price where the technical indicators start suggesting that the selling pressure has relatively come down and there is not much downside left in the stock from that level or price. Same technique can be used while selling the stocks you own. Technical analysis helps you in getting more return out of your investment just by utilizing the momentum in either direction.
So In summary when technical analysis is used in conjunction with fundamental
analysis the return on your investment can be maximized.