When it comes to analyzing the stock market everything will stem from one of two categories. Technical analysis and fundamental analysis. If you prefer to read charts and look at volume trends, your focus is more on technical analysis. If on the other hand you prefer to look at debt and earnings per share, your focus is more on fundamental analysis.
To help you better understand the difference between the two I will share a few simple comparisons with you:
Comparison #1 – The core purpose of fundamental analysis is to return a value that can be used by the investor to compare current stock prices of a particular company. That value will then be used as a buy, sell, or hold rating. With technical analysis, buy, sell and hold ratings don’t exist.
Comparison #2 – To determine intrinsic value, fundamental analysis will focus on macroeconomics. What this basically means is if interest rates are affected later in the year, it will definitely have an affect on XYZ. Technical analysis could care less about what’s going on in the economy. It is more concerned with gap ups than interest rate hikes.
Comparison #3 – Debt, cash flow forecasts, EPS, and other financial ratios are all a part of fundamental analysis. With technical analysis its all about historical price movements. This information is then used to determine what short term, and long term, moves should be made.
When it boils down to it, these are the main three differences between technical analysis and fundamental analysis. Now you have to decide which type of analyst you are. Are you more technical or more fundamental? Knowing this information will help you come up with a sound strategy that will work for you.
Ask yourself if you should try to research more into the other. Doing so could help you expand your knowledge and come up with an even better trading strategy.
Some investors believe it is best to use a combination of both fundamental and technical analysis. Others like Warren Buffet will suggest sticking with one or the other. In my opinion, its all a matter of personal preference. The format you use will depend on your personal goals.
The key is to come up with a strategy you will be willing to stick to. The worst thing you can do is jump around from strategy to strategy. Warren Buffet is successful because he learned the fundamentals inside and out. He started to understand patterns and when he should, or shouldn’t, make a move.
If you want to experience even half of Warren Buffet’s success, you must be just as dedicated to learning the ins and outs of analyzing stocks.
Take your time and learn as much as you possibly can. Avoid letting your emotions dictate how you will analyze a stock. Your emotions will almost always get you in trouble. So check your emotions at the door. Let the facts, and your research, always be the determining factor. If you do, you will be a successful stock trader in no time at all.