Fundamental Analysis vs. Technical Analysis
This topic is often most debated among traders which way one should follow. Some blindly follow fundamental analysis others are biased towards technical analysis. Whatever they do, they are often seen struggling for a constant and steady return from the market. Let me first explain both the terms precisely.
Fundamental analysis is a method for analyzing stocks, share, security or an instrument in a market. The parameters through which we look the condition of a company which includes earnings per share (EPS), price-to-earnings ratio (PE/ ratio), a price-to-book ratio (P/B ratio), net profit margins, and return on equity (ROE). Fundamentalists look for undervalued stocks which have better potential in future to perform. EPS is often referred as a gauge of profitability. It can be viewed as an indicator for company’s profit. By Looking at a company’s EPS performance over time can help an investor determine how a company’s profits are trending. The price to earnings ratio of a company is simply the current stock price divided by its annual earnings per share. When fundamentalist refers to the evaluation of a company they often refer to the P/E ratios. The Fundamental analysis focuses more on the intrinsic values and quality of the stocks and company’s current health status. Another important point to keep in mind is that fundamental analysis has a large time horizon. One cannot buy a stock for a day or a week with fundamental analysis decisions.
On the other hand, a technical analysis includes three parameters – price, volume, and open interest. These numbers are plotted in charts and then the study of charts helps in forecasting the future market trend.The technical analysis focuses on the smaller time frame or, the larger time frame. One important part of technical analysis is the support/resistance zones. One professional always trades from the support and resistance zones.There are various tools available such as trendiness, moving averages to find the direction of the current trend. Other oscillators tools such as RSI and stochastic helps in the exact entry in the direction of the trend. The volume and open Interest confirms the mass psychology of the market that whether the trend is well in control or running out of bulls or bears. The technical analysis helps the trader to identify the patterns such as head and shoulder, cup and saucer, double top, etc. to spot the market reversals.So Technical analysis is time focused analysis of the market.
So the argument of which is better between the technical analysis and fundamental analysis is to be followed to mint money?
A trading is a game in which one is trying to rob another trader without being robbed. It is a very tuff job in the world. It is a place where all the sharpest minds compete. So in this market, the more weapons we bring, the better are our chances of survival. As we are aware that technical analysis helps in picking the best time-based decisions while the fundamental analysis helps in the real fair value of stock. The point is not to make the trading more complicated but to keep it simpler. One good way would be to trade the fundamentally sound stock only with technical analysis as well to find a discounted entry.