How Fundamental Analysis Compares with Technical Analysis
Like index investors, investors who use technical analysis shake their heads in disapproval when they see fundamental analysts carefully examining spreadsheets and financial statements. They, like index investors, see all the effort that goes into fundamental analysis as a waste of time and calculator batteries. That’s because technical analysts assume any information worth knowing is reflected in a stock price.
But technical analysts agree with fundamental analysts in one important way: They, too, think it’s possible to beat the stock market. Unlike index investors, who think that timing the market is futile, technical analysts think stock prices move up and down in observable patterns.
Knowing how to recognize patterns in stock price movements can signal a technical analyst the best times to get in, and out, of stocks. Technical analysts may not even care what a company does, because they’re just looking at the price chart. To a technical analyst, buying and selling at the right time is more important than buying and selling the right stock.
Technical analysts pay close attention to:
- Stock price charts: Technical analysts focus on stock price charts, which are graphs that plot a stock’s movement over a period of time. These charts will show instantly whether a stock is rising or falling in addition to how many trades, or volume, are occurring.
- Trading patterns: Much as an astronomer sees patterns of stars in the sky, technical analysts look for stock price movements that follow a pattern. For instance, if a stock price falls to a low level, rises a bit, and sinks back down to near that same low level, technical analysts call that a support level. A support level is considered a point where demand for a stock is strong enough to stop it from sinking much further.
- Moving averages: Technical analysts often pay close attention to a stock’s average price over a period of time, say 200 days. When a stock falls below its 200-day moving average, or its average price over the past 200 days, that means the stock is vulnerable to fall further, technicians say. The idea is that when stocks fall below their 200-day-moving average, many investors who bought within the past year are losing money and may be nervous and quick to sell.
Here’s an easy way to keep fundamental analysis and technical analysis clear in your mind. Fundamental analysts are looking for the what, or the companies that are attractively priced. Fundamental analysts will often hold their investments for a long time. Technical analysis is more useful for the when. Technical analysts are usually just looking for opportune times to try to profit from short-term moves.