Is technical or fundamental analysis more important?
Analysis is an absolutely key point in the decision-making process. Whether it's a question of buy/no buy, or the right timing of a purchase... analysis is always essential. Analyzing the company itself isn't exactly easy - but to stick a pitchfork in it completely, I'll add that it's not even easy to choose the right analysis in the first place.
To put it bluntly: We all probably know (and use) that analysis is commonly divided into technical and fundamental. Most of the time it is some combination of both. But if we look at the very ends of the spectrum, the extremes that don't allow for the other approach, it looks something like this:
Technical analysis - we look purely at the chart, we only look at the price development. Without looking at fundamentals and knowledge of the company, we just look for the right repeating patterns and use tools, models and techniques to try to buy and sell at the right time. It is also generally called quantitative. It is a hard mathematical discipline. Feelings and subjectivity go by the wayside.
Fundamental Analysis - We look at the company itself. In depth. Financial statements, numbers, competitive advantage, management, past actions, future promises, world fit, customer opinions, etc. We call it qualitative. You could say it's a bit of a "feel", a sense of feel and experience. Well, for the most part.
Extensive video at fundamental analysis here 👇
But which one is better?
That's the question - you will find investors who would swear on anything that fundamental analysis is the best. They look at good return metrics (e.g. ROE, ROIC and ROC), FCF growth etc. and then simply plug the numbers into a DCF model (I could probably do an article on DCF, couldn't I ? 😇 . That's the basics of course. Most of the time, though, you can at least get a basic overview this way. Next, the fundamental investor can focus on other things to include in the consideration.
An analysis of the factors of sustained competitive advantage (" wide moat") such as extreme technological lead, cost of building such a firm, switching costs, network effects, patents, brands, regulatory requirements, etc. is also essential. Also understanding the dynamics of the industry in which the company operates. Who are the industry leaders? Are the barriers to entry high or low? Is the industry experiencing dark times or is it at its most buoyant? Do suppliers have the upper hand? Do consumers have the upper hand? What are the existing and potential substitutes? All of these questions and more are important to understanding a company's business model.
An important point is that in fundamental analysis we tend to look ahead. We're trying to guess, to sense what's going to happen.
But! A trader will probably find it difficult to examine the actions of management and make day trades accordingly. He might as well just click randomly. So he has to choose another helper - technical analysis.
This just looks at the chart and assumes that price movement is influenced by supply and demand. That is, the strength of the market. Itis used to predict the future price of a stock based on statistical data about the stock's past performance.
There are so many models, charts, methods and techniques of technical analysis that it is absolutely impossible to cover in a separate article. In general, however, they are more applicable to shorter time periods and are thus suitable for trading or short term investing.
So back to the question - which is better? The answer is: As per what.
For an investor who is looking to invest over longer time horizons - i.e. from units of years upwards - it is better to focus on fundamental analysis and establish that the company meets all the requirements to grow in the coming years. It may not work out, of course, but with proper and honest analysis we can significantly improve our chances. However, if he has such a long horizon, technical analysis is more or less useless (not entirely, it can be applied to wider time periods and track, for example, macro patterning and chart linkages to macroeconomic and political phenomena). He may not care much for classic "hourly" technical analysis. Fluctuations within minutes, hours or even days are of no interest to him with such a strategy.
But if the investor/trader plans to ride on such short-term fluctuations, then it obviously makes sense to use technical analysis and follow the chart. Ride the hourly and daily price swings and try to pick out the best entry and exit points.
Absolutely!!!The most common representatives using both approachesare speculators and short-term investors. That is, people who invest for the long term, but more actively. Perhaps they are trying to pick up an unknown company that promises a market breakthrough with their specific drug. But that's all this company has to offer. So the investor had to do a fundamental analysis to see if the company has a unique competitive advantage, a solid track record that will allow it to weather the wait for drug approval, or perhaps management capable of solving a sudden problem. But the moment a massive price increase occurs, all he has to do is watch the chart and try to get out in time. Don't panic too early (FOMO), but don't overdo it either and get out early.
Which approach do you prefer? What do you prefer? I admit that I am a big believer in fundamental analysis. If only because of my investment horizon and strategy.
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Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and a few other analyses. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.