Nothing is ever certain when it comes to the stock market. But that doesn’t mean that every trade has to be a complete gamble.
While you can never know exactly how a trade will play out, performing detailed research on the stock and company in question can help you make more informed and calculated decisions when investing your hard-earned cash.
In this post I’ll discuss the two key types of research I use: technical analysis and fundamental research. You’ll learn what these two types of research are, the advantages and disadvantages of each, and how they can help you better identify promising trades.
What Is Technical Analysis?
Technical analysis is a method of evaluating a security based on statistics generated by market activity, such as past price action and volume.
Technical analysts don’t try to measure a security’s intrinsic value. Instead, they focus on charts and indicators to figure out patterns that can suggest future activity.
When to Use Technical Analysis
With this type of research, the actual company in question isn’t as important as the patterns that you see emerging on the chart.
So you wouldn’t necessarily want to use technical analysis to try to project a company’s worth or how it might increase or decrease in the future. You use it to try to identify price patterns that could repeat in the future.
What Is Fundamental Research?
Fundamental research is a method of evaluating securities that attempts to measure the intrinsic value by examining economic, financial, and other qualitative and quantitative factors.
Fundamental analysts try to study everything that can affect the security’s value, including macroeconomic factors and company-specific factors.
When to Use Fundamental Research
With fundamental research, you’re looking very closely at the stock by looking at the company behind it. Fundamental research can alert you to the specific catalysts that have affected the price in the past and can clue you in on things that can affect the price in the future.
The 2 Key Differences Between Technical and Fundamental Analysis
Here are some of the key differences between technical and fundamental analysis:
Technical Analysis Uses Charts, While Fundamental Analysis Relies on Financial Statements
One of the biggest differences between these two types of research are the resources you use to perform them, respectively.
With technical analysis, you employ a stock screener to review stock charts that can give you specifics on the price action of a security over time. You can focus on different time windows and add technical indicators to help focus in on trends and patterns.
On the other hand, fundamental research is a little more like detective work. You look at documents like the company’s financial statements and earnings reports to get an idea of their bottom line. And you look for events or news around the company that can affect the stock price.
Technical Analysis Relies on Historical Data, Fundamental Analysis Relies on Historical Data and Projections
Another key difference between technical data and fundamental data is how to apply the information.
One perk of technical analysis is that it’s fact-based. It tracks a stock’s specific price movement. However, it really only looks to the past.
Fundamental analysis also relies heavily on historical data, but it’s a little bit more open-ended. You can review analyst projections for the stock based on its past performance. For example, when you look at a company’s earnings, you can see the analyst estimates for dividends or earnings in the future.
Strengths and Drawbacks of Technical and Fundamental Analysis
What are some of the pros and cons of each research style? Let’s review:
Strengths of Technical Analysis
- Helpful in identifying patterns
- History can often repeat itself
Drawbacks of Technical Analysis
- Based solely on historical data
- Doesn’t account for future events
- History doesn’t always repeat itself
Strengths of Fundamental Analysis
- Helpful in identifying trends before they happen
- Can help you get a big-picture view of the company
- Potentially alerts you to trends within an entire sector, not just one company
Drawbacks of Fundamental Analysis
- Trends can reverse quickly based on news
- Projections can be unreliable
- A lot of news can be biased
How They Complement Each Other
So, which is better: technical analysis or fundamental research?
There’s no clear winner. Bottom line, technical and fundamental analysis are strongest when used together.
By looking at the technicals you can get an idea of how a stock’s price action is moving and has moved in the past. The fundamentals can give you insight as to why it moves and can alert you to whether the trend might continue in the future.
When considering a stock or sector, you want to build the strongest case you possibly can for your trade. By using a mix of both technical and fundamental research, you can make the strongest decisions and the most calculated trades.
SwingTrades With Paul Scolardi
I’m Paul Scolardi, and I’ve forged a career out of pinpointing momentum stocks before they peak, taking advantage of them by buying low and selling high as a swing trader.
I’ve developed a system to figure out the sector leaders, earnings winners, and hot IPOs before the masses.
If you’re interested in learning my methods and joining me as a swing trader, consider joining my SwingTrades program.
In SwingTrades, my students learn my methods for getting ahead of the curve so that they can learn to spot which stocks are poised to peak in the coming weeks and months.
I’ve taught my methods to over 1,400 students from over 50 different countries. Several students have reported six-figure profits — and I even have a reported millionaire in the mix! Of course, results may not be typical and may vary from person to person.
Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Any investment is at your own risk.
By joining SwingTrades, you can learn my swing trading strategies and how to make smarter choices in your trades!
How do technical analysis and fundamental research factor into your trades? Leave a comment and let me know!