Technical and fundamental analysis are two great ways of picking and sorting stock. When and how you use them solely depends on a trader’s personal preference, although each has its strength.
The fundamental analysis identifies stocks that offer strong potential for growth and at a reasonable price. It does this by examining a company’s underlying business and the conditions that lie within that industry. Investors have, however, used this type of analysis for long-term trades as they depend on metrics like dividend yield, price-earnings ratio, and earnings per share.
On the other hand, technical analysis bypasses the underlying fundamentals of a company. It instead focuses on statistical stock-chart patterns. These patterns foretell future volume and price moves. The idea is, stock prices are an indication of a company’s financial welfare. As such, you won’t gain much poring over the sheets.
The difference in a nutshell
Fundamental analysis
- Economic data is studied to establish a target price
- Data is collected from interest rates, GDP and inflation, etc.
- Requires statistical and economic analysis experience
Technical analysis
- Price movement prediction based on patterns of charts
- Price action chart data collection
- Requires analysis experience
The analysis to choose
The beauty of it all is that you have the option of using both analyses at a go. Both of them can give out helpful information. That is why focusing on one is not advisable, and your best bet is to utilize both.
Their strengths have been seen to compliment the other. For example, use technical factors to identify the ideal exit or entry price and then use fundamental factors to choose a candidate.
So, which one should go fast?
Start with fundamentals and use either the value investor or growth investor strategies.
The value investor is one who seeks out more established and large companies that may have been priced below their earnings or revenue per share. These investors’ focus is on companies leading in their respective industries as their dividend pay is steady.
Similarly, growth investors have a goal of growing and also turning a profit. Some of the profit is eventually returned to shareholders. As such, it is worth noting that not many new companies are profitable.
However, if a new company has an initial revenue growth that shows strength, it might be a good prospect for growth investors. Once the investor determines that a young company has a competitive advantage, its stock prices may be driven higher.
Technical signals
Selecting stock using technical analysis is a three-step affair: screen for stock, scan charts and set up a trade.
When screening for stock, you have to aim to have about 25 candidates. After that, start narrowing that list down until you are left with about four candidates. Lastly, perform a detailed analysis of the carts, then settle for one.
What to consider when screening for stock
- Momentum: Technical traders identify up-trending and strong stocks for possible buys and the down-trending ones for shorts. One easy way of finding them is by using moving averages. To calculate a moving average, you have to average the closing price of a stock over a given period. Most traders prefer using 20 days as the starting point. This is, however, dependent on a person’s trading style.
- Industries and sectors: Identify sting industry and sector groups for those willing to purchase stock, hoping that its price will rise—likewise, weak one in anticipation of going short.
- Market and price capitalization: This is a good starting point because you will eliminate much stock immediately. For example, if stocks that have been priced over $100 aren’t attractive to you, you can choose to exclude them during screening.
Conclusion
Most traders argue that the analysis they are using is the best. There is no good or bad analysis, and it all depends on a person’s trading needs and strategies. Trying out both types will give you some insight on how to develop a trading strategy best.
They are both equally efficient depending on your trading scope. You will also find traders who [refer using them separately.
If you are still confused about what to do, make good use of the dummies offered and try to use as many indicators as you possibly can. That way, you will know what you want by the time you enter the real Forex market.