For years, I have been asked this same question over and over again, "Which is better, fundamental analysis or technical analysis?".
For decades, analysts of one camp argued about the ineffectiveness of the other and provided reasons and evidences how one method of analysis can be used at the exclusion of the other. For decades, fundamental analysts; people who dig deep into the business model and financial statements of companies, gave proof to the ineffectiveness of technical analysis. For decades too have technical analysts; people who read charts to find trends, patterns and investor behaviors, gave proof to the ineffectiveness of fundamental analysis.
Suddenly, it feels like there are 2 different worlds existing simultaneously, talking about the same stocks, same markets with views that are supposed to have nothing to do with one another. How is that possible?
If fundamental analysis is truly ineffective, why have fundamental analysis existed for so many centuries? If technical analysis is truly ineffective, why are technical analysis and chartists still paid so much money in Wall Street? If fundamental analysis is ineffective, why does earnings releases move stocks so much? If technical analysis is ineffective, why do resistance levels and support levels prove to be accurate time and time over again? What if both methods are truly one and the same thing?
Yes, fundamental analysis and technical analysis are really two sides of the same coin, two perspectives on the same issue and two components making up a full picture.
Fundamental analysis explores 2 main issues; Earnings expectation and Growth expectations. The ultimate objective of fundamental analysis is to arrive at an opinion on the future profitability of a company and how much that profitability is worth in terms of stock price. The higher the earnings expectations and growth expectations, the higher the stock price ought to be. However, scientific as this may be, it is missing the final element that moves stocks... investor sentiments or how much investors think that earnings and growth expectation is ultimately worth! Technical analysis reflects the final verdict of investors towards that earnings and growth expectation. Without this final verdict, all analysis is meaningless. However, this final verdict may not always be inline with your own expectation towards the future profitability and growth of a company. Because both fundamental analysis and technical analysis is really the same thing, a decision to buy or sell a stock should take both views into consideration. When fundamental analysis revealed a potential rise in earnings, does the charts support that view? Have investors started moving ahead of the news? Does the trend so far reveal that investors are not impressed with that outlook at all? When a reversal signal turns up in technical analysis, is there any fundamental reasons driving that reversal? Is it just nothing but an unsustainable exuberance not supported by fundamental reasons?
That being said, when a company's fundamental outlook is continuously strong over a long period of time, technicals will also reflect that same long term strength through long term bullish trend and patterns.
In this sense, fundamental analysis and fundamental analysis are truly one and the same and nobody can do with one and not the other. It is like examining the physical attributes of a boxer versus his track record. You cannot have a complete picture of the capabilities of a boxer unless you take both views into consideration.
Because fundamental analysis and technical analysis are 2 different views on the same subject, they both have certain strengths over each other.
Fundamental analysis is capable of telling if a company has long term growth potential and whether or not its stocks are worth while long term investments. However, fundamental analysis is incapable of predicting or explaining short term trends of a few days that are not caused by fundamental company events like earnings release. Technical analysis on the other hand is capable of telling when prices are out of sorts and when prices shouldn't rise or fall anymore using support and resistance levels. Such knowledge is extremely useful in trading short term trends. However, technical analysis has proved to be ineffective at predicting long term price actions as business fundamentals does change significantly from year to year.
I hope I have resolved the feud between fundamental and technical analysis today and that you have understood that both are really the same thing, talking about the same thing while providing a slightly different perspective. I hope you will embrace both methods from now on and use the right bias on the right investment horizon and outlook. I personally use both analysis in my stock options trading and I would turn the bias towards technical analysis in my short term trading System">short term trading System, the Star trading system.
Jason Ng is the Founder and Chief Option Strategist of Masters 'O' Equity Asset Management ( MastersoEquity.com ) and author of OptionTradingPedia.com . He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.
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