Fundamental vs. Technical Analysis: An Overview

Fundamental and technical analysis are two major schools of thought when it comes to approaching the markets, yet are at opposite ends of the spectrum. Investors and traders use both to research and forecast future stock prices. Like any investment strategy or philosophy, both have advocates and adversaries.

Fundamental Analysis

Fundamental analysis evaluates stocks by attempting to measure their intrinsic value. Fundamental analysts study everything from the overall economy and industry conditions to the financial strength and management of individual companies. Earnings, expenses, assets and liabilities all come under scrutiny by fundamental analysts.

Technical Analysis

Technical analysis differs from fundamental analysis, in that traders attempt to identify opportunities by looking at statistical trends, such as movements in a stock's price and volume. The core assumption is that all known fundamentals are factored into price, thus there is no need to pay close attention to them. Technical analysts do not attempt to measure a security's intrinsic value. Instead, they use stock charts to identify patterns and trends that suggest what a stock will do in the future.

Popular technical analysis signals include simple moving averages (SMA), support and resistance levels, trendlines and momentum indicators.

Fundamental analysis and technical analysis are the major schools of thought when it comes to approaching the markets.

Simple Moving Averages

Simple moving averages are indicators that help assess the stock's trend by averaging the daily price over a fixed time period. Buy and sell signals are generated when a shorter duration moving average crosses a longer duration one.

Support and resistance utilize price history. Support is defined as areas where buyers have stepped in before, while resistance are areas where sellers have impeded price advance. Practitioners look to buy at support and sell at resistance.

Trend lines are similar to support and resistance, as they provide defined entry and exit points. However, they differ in that they are projections based on how the stock has traded in the past. They are often utilized for stocks moving to new highs or new lows where there is no price history.

There are a number of momentum-based indicators, such as Bollinger Bands®, Chaikin Money Flow, stochastics and moving average convergence/divergence (MACD). Each of these have unique formulas and provide buy and sell signals based on varying criteria. Momentum indicators tend to be used in range-bound or trendless markets.

Key Takeaways

  • Fundamental analysis evaluates securities by attempting to measure their intrinsic value.
  • Technical analysis differs from fundamental analysis, in that traders look to statistical trends in the stock's price and volume.
  • Both methods are used for researching and forecasting future trends in stock prices.