Eyes on the price – Technical or Fundamental?
Many beginner traders struggle with the question of which method should they rely on, and focus their efforts to learn. The question usually rises after acquiring basic understanding of the market, and while starting to focus on trading itself. Needless to say, each method has its own advantages and disadvantages, and there are successful traders on both sides of the argument, but which of these analysis methods will get you the best results, or in other words, the most profit?
According to The Financial Academy, Fundamental Analysis is an analysis that is carried out in order to forecast the price movements of the market. All the internal and external factors that could influence an assets price are evaluated. These can include interest rates, financial policy, and overall local and global economic conditions as well as politics and the environment.
However, the difference of these two approaches are, when you dive deeper into learning them, the inevitable conclusion you’ll reach is that they are interlinked.
Technical analysis has quite a different approach to the estimation of buying and selling levels compared with fundamental analysis. Indeed, fundamental analysis, as used by bank analysts (leading to recommendations), mainly relies on financial ratios linked with the company’s fundamentals. Thus, ratios such as stock price on expected earnings, market cap on turnover, debt level, will be studied…. As norms are determined, they enable to determine the risk level associated with an acquisition or a sale of a share. For example, one common norm consists of looking mainly for stocks whose stock price / expected earnings per share ratio stands below twenty, which is considered as a major threshold. Similarly, a major level for the market cap / turnover ratio stands around two. Still, this method may lack some elements.
One example, are the IT stocks at the beginning of the year. Many of these stocks reached a stock price / earnings ratio above 100 and a cap / turnover ratio above 10. From a fundamental point of view, what should we do? Either we establish new ratios, specific to the “New Economy”, which can take some time, or we stay with the former ratios, which leads to avoiding good opportunities. Moreover, it often appears that the stock price evolution does not necessarily reflect actual fundamentals of the companies, as overreaction effects (both on the downside and on the upside) are quite common, especially relatively to announcements.
We are all familiar with the story of the teacher teaches his students, that one pencil can be easily broken while a fist full of pencils will be extremely hard to break by hand. The teacher explained that together the students will always be better and stronger than the individual. The rule applies the same for trading. The combination of more factors in your analysis will always make it stronger and more accurate. If you are able to successfully integrate your Technical patterns with Fundamental information your success rate is sure to rise.
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