Technical vs. Fundamental Analysis: Which One to Use for Stock Market Trading?

Sykes & Ray Equities (I) Ltd.

Disclaimer: This post is for educational purposes only. Markets are subject to risk, so please consult your financial advisor before making any investment decisions

There is stock market and still more opportunity with endless creation in wealth. Thus, to come up with an appropriate way for analyzing stocks the two prominent tools are available nowadays: Technical Analysis and Fundamental Analysis. Let us discuss how this article provides one with information of these methods based on the criteria of their comparison, methodologies tools, pros and cons for right decision making in the respective application.

Introduction

In the dynamic world of stock trading, one has to understand technical and fundamental analysis. Technical analysis focuses on the price trend and pattern, whereas fundamental analysis measures the intrinsic value of a stock. Both of these methods have different purposes and serve different needs depending on trading style and goals. Let's go into the details of both.

What is Technical Analysis?

Definition: Technical analysis is looking at past trends in price movements, patterns and trading volumes. It is supposed to forecast a future movement for the stock by assuming that the repeated behavior of collective market psychology persists.

Functions of Technical Analysis:

• Identifies Trends: Determines when the stock market is in the bull or the bearish trend
• Timing Trades: Helps traders specify entry and exit points
• Market Sentiment Evaluation: Volume and momentum indicators are analyzed to understand behavior in the market.

With over 34 years of experience serving our clients, we offer personalised 1-on-1 consultations to help you understand market trends and invest in fundamentally strong stocks. Contact us at 022-61937300 or visit www.sre.co.in for more details. Invest smart with SRE.

What is Fundamental Analysis?

Definition: Fundamental analysis gauges the intrinsic value of an enterprise by referring to its health, economic and industrial position, assuming that equities will in the long term reflect the price of the business.

Functions of Fundamental Analysis

• Financial Health Assesment: It looks at a company's balance sheet, income statement, cash flow statement
• Industry Trends and Trends: Understanding it competitive position in the industry.
• Long-term Projections: Long term and sustainable profitability and growth potential.

Differences Between Technical and Fundamental Analysis

Methodology

Technical Analysis Methodology:

1. Analyze price charts to look for patterns (head and shoulders, double tops).

2. Indicators like moving averages, Bollinger Bands, and RSI are used for insights.

3. Analyze the support and resistance levels to time trades.

Fundamental Analysis Methodology:

1. Examine financial statements like income statements and balance sheets.

2. Assess macroeconomic conditions and industry dynamics.

3. Qualitative factors like management quality and market position are also examined.

With over 34 years of experience serving our clients, we offer personalised 1-on-1 consultations to help you understand market trends and invest in fundamentally strong stocks. Contact us at 022-61937300 or visit www.sre.co.in for more details. Invest smart with SRE.

Types of Trading

1. Day Trading: Highly dependent on technical analysis for intraday price movements.

2. Swing Trading: Uses a combination of technical and fundamental analysis to take advantage of medium-term trends.

3. Position Trading: Fundamentally depends on long-term investment decisions.

4. Scalping: Uses only technical analysis for ultra-short-term trades.

The Pros and Cons of Fundamental and Technical Analyses

Technical Analysis Pros:

• Rapid decisions for intraday trading.
• Applicable across asset classes.
• Actionable insights from real-time data.

Technical Analysis Cons:

• It neglects intrinsic stock value.
• Too much dependence on historical data that fails to indicate future movement every time.

Fundamental Analysis Pros:

• In-depth understanding of a company's long-term prospects.
• Robust against short-term market volatility.
• Value investors looking at creating wealth.

Fundamental Analysis Cons:

• Research and time-consuming.
• Limited utility for intraday traders.

Tools of Technical and Fundamental Analysis

Technical Analysis Tools:

1. Charts: Line charts, bar charts, and candlestick charts.
2. Indicators: Moving averages, RSI, MACD, Bollinger Bands.
3. Volume Analysis: Measures market participation and momentum.

Fundamental Analysis Tools:

1. Financial Ratios: P/E ratio, debt-to-equity ratio, and return on equity.
2. Reports: Annual reports, earnings calls, and industry whitepapers.
3. Economic Indicators: GDP growth, inflation rates, and interest rates.

With over 34 years of experience serving our clients, we offer personalised 1-on-1 consultations to help you understand market trends and invest in fundamentally strong stocks. Contact us at 022-61937300 or visit www.sre.co.in for more details. Invest smart with SRE.

Which One to Use for Stock Market Trading?

The choice between technical and fundamental analysis depends on your trading goals, style, and time horizon:

• Technical analysis for Short-Term Traders: Technical analysis is perfect for identifying quick opportunities based on price movements and trends.
• For Long-Term Investors: Fundamental analysis provides a deeper understanding of a company's value and is therefore fit for sustainable portfolios.
• Combined Approach: Most successful traders and investors use a hybrid of both to validate their decision.

Evaluate your preferences, resources, and objectives to determine the best approach for your stock market trading journey.

Conclusion

Both technical and fundamental analyses will help you successfully navigate the arena of stock market trading. While technical analysis helps short-term speculators, fundamental analysis is suitable for long-term wealth creation. When used in concert, a mix of both allows you to have an overall view in order to be better informed when making trading decisions.

With over 34 years of experience serving our clients, we offer personalised 1-on-1 consultations to help you understand market trends and invest in fundamentally strong stocks. Contact us at 022-61937300 or visit www.sre.co.in for more details. Invest smart with SRE.