Technical Vs Fundamental Analysis (By Farouk)

Through the years I had spent years investing my money in different asset classes around the world, I always met people who were either technical analysts or fundamental analysts, and even though these people have nothing in common, one thing was always common, technical analysts were always losing money and fundamentalists were always making money. Out of every 10 technical analysts I met one fundamental analyst, and to my surprise the only one smiling there on the trading floor was the fundamental analyst.

Fundamental analysis is based on researching the stock you are going to buy, knowing its financial position and estimating a value for it. Technical analysis is based on charting, where the only reason to buy a stock is finding a good signal in its curve.

Technical analysts

Technical analysts claim that human behavior can be easily predicted from charts, and while part of what they are saying is true, as a human behavior expert I can confidently say that charts are useless. Yes you can expect a stock price to go up because it broke through a strong resistance in the chart but you didn’t take into account that a new piece of information that is released the next day may have the power to reverse this signal.

Buying a company just because its chart looks good is way far from investing, it better fits under the act of speculating. If you don’t believe this now, then go invest your money using technical analysis only and when you lose your money come back and read about fundamental analysis.

Fundamental analysis

Fundamental analysis requires you to know the stock’s financial position, its sales, its net profit and lots of other figures that are directly related to financial performance. I guess you now know why technical analysis is very popular compared to fundamental analysis, simply because fundamental analysis requires more effort.

Buying a company because you know about its current financial position and its growth prospects is more likely to make you realize profits than buying a company that you know nothing about just because its chart looks interesting.

Technical and fundamental analysis together

You might think that I am against technical analysis but this is not true, the best way to invest your money in the stock market is not to use technical analysis only or fundamental analysis only but its to use them together.

You should first use fundamental analysis to determine which stock you are going to buy and after determining what to buy, you should then use technical analysis and charts to pick the right timing to buy it so that you can maximize your profits.