You can ask any stock trader and they’ll tell you that sometimes they wish they could see the future. Not just a prediction of the future — no, they want the true power of future sight, whether through a crystal ball or mental visions of what the future holds.Unfortunately, such things are impossible. Stock traders must instead make use of the next best tools, including their instincts, knowledge and stock growth trends. We obviously know how to utilize our instincts and gain knowledge, but what about these growth trends? How do we measure them, and how do we forecast them accurately?
Stock-picking methodologies exist that help us to research and forecast the trends of stock. There are two main methods of analyzing stock trends: fundamental analysis and technical analysis.While both are reputable methods for predicting the trends of stocks, both are very different. I have my own preference as to which analysis method is the better one, but first we must discuss the differences between the two and why one may be more advantageous over the other.
In a nutshell, fundamental analysis focuses on the intrinsic value of stock. This means the value of an asset in both tangible AND intangible forms. This value can deviate from the actual current market value of stock because it takes into consideration not technical forms of value, like the perception of value.
Those who use fundamental analysis as their growth forecast methodology will have to study many different moving parts while assessing the value of stock. The economy as a whole, the potential of a business, other financial conditions…in short, there’s a lot of work involved with evaluating stock using this time of forecasting.
Technical analysis focuses on statistics and market activity from a very straight-forward standpoint. When you utilize this method of growth forecasting, you look strictly at hard facts — data, past prices, stock volume, stock charts. This value is more absolute than intrinsic, meaning this method doesn’t utilize intrinsic value.Stock charts are indeed a big part of technical analysis. These are used to scientifically and mathematically predict trends based on facts already present, with the idea that these trends will likely continue.
Fundamental vs Technical Analysis
Based on the above definitions and descriptions, the difference between these two methodologies should be obvious…but let’s discuss the disparities in greater detail.First, fundamental analysis is much more conceptual. It uses perception more so than fact. Meanwhile, technical analysis is much more based on past figures and concrete information. It utilizes data instead of concepts and suppositions.
As an example, you discover stock you’re interested in investing in, but you want to know whether or not the value of the stock will grow over time.On one hand, you can look at the bigger picture. The age of the business, the information about their popularity and image online, economic potential and the success of other projects developed by the business owners. On the other, the stock already has some history. It’s grown in value over the past year at a steady pace and has recently stalled slightly, but still in a positive direction.
Utilizing either of these prediction methods can end you up at the same conclusion, but that isn’t always the case. One is much more direct and based on logic, while the other is based on conceptual ideas and contexts that aren’t necessarily relevant to stocks. (Can you tell which methodology I support?)
Which Methodology Wins…?
To make things very clear, fundamental analysis is like literature while technical analysis is like algebra. Both curricula have their own merits, but which one should you apply to the stock market? The one based on interpretation and conceptual evidence, or the one that relies on math?
Fundamental analysis takes a lot of different financial aspects into consideration — and sometimes this is a good thing. For instance, you buy up some stock you believe will do well based on its initial Q1 growth. However, researching the company would have led you to find the business owner is a pathological startup founder with projects that frequently flounder and flop within a year. This stock value looks good on paper, but conceptually it isn’t that great a decision.
However, only looking at the perception of value doesn’t actually include the actual value and data. You may write off stock based on perceived value that actually holds growth potential based on its market value.But again, how is this value measured? Do fundamental analysts simply guesstimate the value and call it a day? No — they do use some data sets to influence their thoughts on intrinsic value, like income statements, cash flow statements and business balance sheets. These show conceptual trends, like a business’ overall potential.
Technical analysts don’t believe this data is relevant. Everything they need to know can be found within stock charts that show legitimate trends and values. This is also known as the Efficient Market Hypothesis, or the idea that any past information or perceptions are already reflected in existing stock prices, and in such a way that can be measured — not JUST perceived.There’s also a question of time, which is another area in which I think technical analysis wins. Fundamental analysis focuses on long-term investments. After all, you can’t judge concepts like business value based on only one quarter. Fundamental analysis often requires multiple quarters or years worth of data and experience in order to accurately assess the trends.
On the other hand, technical analysis is all about short-term investing. Stock charts don’t require years of data in order to show existing trends that can be used to make predictions.
I want to be clear on one point in particular: this is my recommendation and my opinion. I believe that technical analysis is the better method as compared to fundamental analysis, and I believe I have the experience to back that up.However, that doesn’t mean I don’t know the ins and outs of fundamental analysis. Your trading education should be focused on learning about every method possible and picking which works best for you. Will you choose the fundamental analysis school of thought? Or will you follow in my footsteps and believe in technical analysis above all else?