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Fundamentals Analysis Vs Technical Analysis?
Great investors use fundamental analysis when they select investments. What is the benefit of using Technical Analysis when we select investments such as stocks?
Answers
4085 points
EthanR answered one year ago …
I believe that timing is the key reason to use technical analysis, both for entering and exiting positions for maximum profit.
Lets take a great growth stock like Starbucks (SBUX) for example. This stock has been run through the coffee grinder in the past six months! But the technical difficulties usually emerge even before the fundamentals change. Fearing a recessionary climate, the stock began to decline, dropping through key support levels. It was obviously time for people to get out of the stock, but if one is only interested in fundamentals, they may have gotten out much later, waiting for the next earnings report to decide if the fundamentals were still intact. Apple is now going through a similar fate. The fundamentals remain terrific, but the stock is breaking down.
So what we want to do is to find stocks where the fundamentals are strong, but only buy them when the technicals tell us that the stock is poised to go higher. Buying a stock when the technicals are overbought and breaking down will guarantee us a loss of 5 or 10% from our buy price. But buying a stock with strong fundamentals when the technical indicators are just emerging from oversold will give us an additional 5 or 10% boost.
2183 points
ChaosNantuko answered one year ago …
Fundamental analysis looks good. It can find companies that, given a number of years, could triple, or even quadruple in value. Thats great for marketing. The fact of the matter though, is that the stock market moves a percentage point or so every day. It doesn't sound like much, but consider this. If, using technical analysis, you can get even half of that 1% every day, then in a single year, you would be up over 200% (assuming profits are reinvested).
Technical analysis is similar, in that it relies on patterns to capture many smaller moves in order to make large profits. Technical analysis is strongly related to risk management, in that it tells you when you should exit the position, when to enter, etc. In fact, many technical traders are wrong more then their right, yet because of the extensive risk management technical analysis forces, they're still highly profitable.
I believe the reason there are no extremely well known investors who use technical analysis is because if your trading vast sums of money, you have to enter and exit positions slowly. If your entering and exiting positions slowly, its significantly harder to take advantage of the signals given by technical analysis. Basically, if you have half a billion dollars, and you try to use technical analysis, you'll probably "move the market", and it will backfire. Whereas if you have half a billion dollars, and you use fundamental analysis, moving the market a bit in the short term doesn't matter as long as your original reason is correct, because your holding for years on end. Technical analysis experiences diminishing returns as the amount invested increases.
As a final note, I think it should be pointed out that these "great", well known investors are anomalies. I'm confidant they aren't the only once using value investing, or fundamental analysis, yet i was under the impression there are still less then 500 billionaires on earth, so that leads me to believe that value investing doesn't work for most people as well as it did for these legends.
1130 points
sundarkambam answered one year ago …
Link:
http://www.fxdd.com/learning-center/forex-trading-tutorials/fundamental-vs-technical.html
I have modified some aspects in this article ....
Fundamental analysis is more effective in predicting trends for the long-term (longer than one year), while technical analysis is more appropriate for shorter time horizons (0-90 days). Combining both approaches is suggested to be best suited for periods between 3 months and one year.
Technical analysis of long-term trends helps identify longer-term technical "waves," and that fundamental factors do trigger short-term developments.
A large number of traders combine the two approaches, even instinctively. Thus, technically inclined traders do pay attention to central bank meetings, give consideration to employment reports and heed the latest inflation numbers. Similarly, fundamental traders are often trying to figure out the major and minor levels of support, and determine the percentage of retracement formations. There does not exist a specific formula for figuring out the optimum approach of combining fundamental and technical analysis . Some computer software packages claim to be able to make such decisions, weighing one approach against another depending on economic, technical and quantitative parameters. Yet, these are based on models from past patterns of inter-market dynamics and previous technical and fundamental behavior.
Another beautiful comparison can be found at
http://www.investorsintelligence.com/x/why_technical_analysis.html
Technical Analysis versus Fundamental Analysis
Fundamental Analysis concerns itself with establishing the value of stocks and other instruments. The fundamental analyst will concern himself with complex inter-relationships of financial statements, demand forecasts, quality of management, earnings and growth, etc. He will then make a judgement on the share, commodity, or other financial instrument, often relative to its sector or market peers and form a judgement whether it is over- or under-valued.
The majority of stock research from brokers or investment banks will be based on company fundamentals. At Investors Intelligence, while we admire much of this work we take a more pragmatic approach; we monitor and analyse the ways in which investors interpret this mass of fundamental data and how they then behave. This behaviour is collectively called sentiment. Our view is that investor sentiment is the single most important factor in determining an instrument’s price.
We believe that technical analysis holds the key to monitoring investor sentiment. Some investors and market “experts†believe that fundamental analysis and technical analysis are mutually exclusive. We disagree. We think they are highly complementary and should work together to tell you what to buy or sell and when to buy or sell. Many successful traders use a combination of fundamental stock selection procedures and technical analysis timing filters with excellent results.
Also look at the link
http://books.google.com/books?id=VgG5N5QfCMcC&pg=PA43&lpg=PA43&dq=fundamentals+analysis+vs+technical+analysis&source=web&ots=iQC-ExDHd9&sig=lR8E5nwq8X_T9Nay3LQRRT27vRs#PPA49,M1
See pages 43 to 49 which gives a beautiful contrast between Fundamental and Technical Analysis.
103 points
stockprof answered one year ago …
While technicals are always important, fundamentals ALWAYS drive technicals over the long term. Short term, fundamentals can be very meaningful to the contrarian investor, resulting in some very efficient bottom fishing.
Read more from stockprof123 points
Engimuneer answered one year ago …
Use fundamental analysis to find a company you want shares in, then use technical analysis to tell you when to jump in and out. Get the best of both worlds.
Read more from Engimuneer
244 points
KenLong answered one year ago …
Technical analysis, particularly chart reading is necessary for sucessful trading. Otherwise you'll have no idea when to enter or exit a position, or where to set a stop or target.
Extremely long term, buy and hold value investing can be done without any of this, but the results are much better when they wait for a new uptrend to begin and trail a stop to prevent major drawdown.
102 points
weissbl answered one year ago …
Fundamentals are based upon what the company reports. They can be manipulated to make the company appear weak or strong, depending upon how the management wants the company to be perceived by the public. This is extremely useful to the company, as a weak posture allows insiders to accumulate shares at bargain prices, while a strong posture allows insiders to sell shares to the public at inflated prices.
Technicals, especially over a very long time frame (think years), allow the chart reader to infer this posturing, and ride along with the insiders.
