Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. As mentioned earlier, technical analysis looks at the price movements of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals. Let's discuss in detail the difference between these two approaches, criticism of technical analysis, and how technical and fundamental analyses can be used together to analyze securities.
THE DIFFERENCES
CHARTS VS. FINANCIAL STATEMENTS
At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. In this approach, investment decisions are fairly easy to make - if the price of a stock trades below its intrinsic value, it's a good investment.
Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technical analysts believe that all the information they need about a stock can be found in its charts.
TIME HORIZON
Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used in a time frame of weeks, days or even minutes, fundamental analysis often looks at data over a number of years.
Thus one of the reasons for fundamental analysts to use a long-term timeframe is that the data they use to analyze a stock is generated much slower than the price and volume data used by technical analysts.
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