Sunday, July 29, 2007

Lesson-5 Fundamental Vs. Technical Analysis


The Differences

1.Charts vs. Financial Statements

Technical analysis and fundamental analysis are the two main schools of thought in the financial markets.


A technical analyst starts from the charts, while a fundamental analyst starts with the financial statements.


By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's value.


In financial terms, an analyst attempts to measure a company's intrinsic value. In this approach, investment decisions are fairly easy to make - if the price of a stock trades below its intrinsic value, it's a good investment.


Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price, all the information they need about a stock can be found in its charts.


2. Time Horizon
Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis (which is view in short term, it could be in time span of or few seconds to few minutes).


While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years.


It can take a long time for a company's value to be reflected in its market price, so when a fundamental analyst estimates intrinsic value, a gain is not realized until the stock's market price rises to its "correct" value.


This type of investing is called value investing and assumes that the short-term market is wrong, but that the price of a particular stock will correct itself over the long run. This "long run" can be timeframe of few months to several years.


3.Trading Versus Investing

technical analysis is used for a trade for eg.it could be intraday, swing trade, or Buy Today Sell Tomorrow [BTST],whereas fundamental analysis is used to make an investment.


Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a higher price.


Conclusion.

There are arguments to be made on both sides and, therefore, it's up to you to do the homework and determine your own philosophy.


Market participants can have experience great success by combining the two.

For example, some fundamental analysts use technical analysis techniques to figure out the best time to enter into an undervalued security.


Oftentimes, this situation occurs when the security is severely oversold. By timing entry into a security, the gains on the investment can be greatly improved.


Some technical traders might look at fundamentals to add strength to a technical signal. For eg, if a sell signal is given through technical patterns and indicators, a technical trader might look to make his or her decision by looking at some key fundamental data.


Oftentimes, having both the fundamentals and technicals on your side can provide the best-case scenario for a trade.


Excerpts Edited by me and with contents courtesy-Investopedia and answers.com

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