Fundamental Analysis Vs Technical Analysis
Fundamental
Analysis & Technical Analysis It's Both Different is often most debated
among traders which way one should follow. Some blindly follow fundamental
analysis others are biased towards technical analysis. Whatever they do, they
are often seen struggling for a constant and steady return from the market. Let
me first explain both the terms precisely.
Fundamental
analysis is a method for analyzing stocks, share, security or an instrument in
a market. The parameters through which we look the condition of a company which
includes earnings per share (EPS), price-to-earnings ratio (PE/ ratio), a
price-to-book ratio (P/B ratio), net profit margins, and return on equity
(ROE). Fundamentalists look for undervalued stocks which have better potential
in future to perform. EPS is often referred as a gauge of profitability.
It
can be viewed as an indicator for company’s profit. By Looking at a company’s
EPS performance over time can help an investor determine how a company’s
profits are trending. The price to earnings ratio of a company is simply the
current stock price divided by its annual earnings per share. When
fundamentalist refers to the evaluation of a company they often refer to the
P/E ratios.
The
Fundamental analysis focuses more on the intrinsic values and quality of the
stocks and company’s current health status. Another important point to keep in
mind is that fundamental analysis has a large time horizon. One cannot buy a
stock for a day or a week with fundamental analysis decisions.
On
the other hand, a technical analysis includes three parameters – price, volume,
and open interest. These numbers are plotted in charts and then the study of
charts helps in forecasting the future market trend.The technical analysis
focuses on the smaller time frame or, the larger time frame. One important part
of technical analysis is the support/resistance zones. One professional always
trades from the support and resistance zones.
There
are various tools available such as trendiness, moving averages to find the
direction of the current trend. Other oscillators tools such as RSI and
stochastic helps in the exact entry in the direction of the trend. The volume
and open Interest confirms the mass psychology of the market that whether the
trend is well in control or running out of bulls or bears. The technical
analysis helps the trader to identify the patterns such as head and shoulder,
cup and saucer, double top, etc. to spot the market reversals.So Technical
analysis is time focused analysis of the market.
So
the argument of which is better between the technical analysis and fundamental
analysis is to be followed to mint money?
A
trading is a game in which one is trying to rob another trader without being
robbed. It is a very tuff job in the world. It is a place where all the
sharpest minds compete. So in this market, the more weapons we bring, the
better are our chances of survival.
As we are aware that technical analysis helps in picking the best time-based decisions while the fundamental analysis helps in the real fair value of stock. The point is not to make the trading more complicated but to keep it simpler. One good way would be to trade the fundamentally sound stock only with technical analysis as well to find a discounted entry.
Conclusion
In Fundamental Analysis, the stock is bought by the Any investor when the market price of the stock is less than the intrinsic value of the stock. As against, in technical analysis, the stock is bought by the traders, when they expect that it can be sold at a relatively higher price.
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