When it comes to stock research, too many traders get confused about technical analysis and fundamental analysis.
Let’s dig a little deeper here … This kind of research can radically change your approach to the market.
First, let’s ask a few key questions … How do the best traders analyze stocks? Are you confused about how to find awesome trade setups?
And do you shy away from the terms technical and fundamental because you don’t really know what they mean?
Let’s clear all of that up…
Read on to learn about technical analysis and fundamental analysis. We’ll compare them to help you understand how you can use each in your trading. You’ll also learn about how we use each in the StocksToTrade Pro community…
Let’s jump right in!
Table of Contents
- 1 What Is Fundamental and Technical Analysis?
- 2 Fundamental Analysis
- 3 Pros and Cons of Fundamental Analysis
- 4 Technical Analysis
- 5 Pros and Cons of Technical Analysis
- 6 Technical vs. Fundamental Analysis: The Verdict
- 7 How You Can Use StocksToTrade for Analysis and Trading
- 8 Conclusion
- 9 One Platform. One System. Every Tool
What Is Fundamental and Technical Analysis?
There are two major styles of stock analysis: fundamental and technical.
Fundamental analysis involves evaluating a stock using its underlying metrics, such as earnings, debt, equity, sales numbers, economic conditions, and company management.
Fundamental analysts use this information to try to gain insight into a company’s future growth prospects and determine whether its stock price is at a fair value.
Technical analysis, on the other hand, involves evaluating a stock using its chart, price, and volume data.
Technical analysts use charts to see historical price movements and trading volume, looking for certain patterns and trading behavior. They then use this information to help them make informed decisions as to what a stock price could do next.
Many newbie traders are often confused as to which form of analysis is best and what they should focus on. So let’s take a deeper look at both methods and how useful they can be for the everyday trader.
For example, say a stock trades at $50, but a fundamental analyst determines the stock should be worth $100. The trader may buy the stock with the expectation that the market will eventually correct itself and the price will rise to $100.
The opposite is true with an overpriced stock. Let’s say a fundamental analyst holds a stock that trades at $100, but the analysis shows it’s worth $50. That would likely be enough to push that trader to sell the stock.
Fundamental analysis involves looking through a company’s inner workings — its management, business model, financials, and economic conditions. Let’s check out some of the major metrics and concepts used in fundamental analysis.
Revenue is the amount of income a company brings in over a certain period of time through things like sales, fees, and royalties.
Revenue is a raw income number — it doesn’t account for the costs of doing business, such as expenses and losses.
Fundamental analysts look for overall trends in revenue growth that may imply the company is selling more of its products or services.
A company’s earnings are also known as company profits. It’s the revenue minus expenses — the amount of money a company can keep.
The earnings per share (EPS) ratio takes the entire company earnings and divides it by the number of shares the company has. The ratio shows the company’s profitability for a given time period.
Fundamental analysts compare EPS figures for different quarters, as well as the stocks of competing companies. By analyzing these metrics, analysts can evaluate a company’s overall financial health.
Price/Earnings Ratio (P/E Ratio)
A stock’s P/E ratio is determined by its current trading price divided by the current annual earnings per share.
For example, a stock currently trading at $20 with an EPS of $1 is trading at a P/E ratio of 20.
The P/E ratio is a simple way of determining whether a stock is cheap or expensive compared to other points in history and compared to other stocks.
Balance Sheet Analysis
The balance sheet shows a company’s assets, liabilities, and equity at a certain point in time. Assets are anything of value that a company currently owns. These include cash holdings, equipment, property, and more.
Liabilities are a company’s debts that the company will eventually have to repay. These debts may be held over the short or long term.
Equity is the value of the assets minus the value of the liabilities. So if a company has $10 million in assets and $6 million in liabilities, then the company holds an overall $4 million of equity on the balance sheet.
Fundamental analysts use the balance sheet to determine the value of tangible assets that come with owning the stock. In general, a well-capitalized company that holds a lot of equity can be a sign of a good business.
Pros and Cons of Fundamental Analysis
Fundamental analysis can be extremely useful for certain traders or investors, but it’s not without its downsides. Let’s look at both sides.
Fundamental Analysis Pros
- By conducting deep fundamental analysis, you may discover certain things that the market doesn’t notice. That can help you find trade opportunities.
- If you want to hold a stock long term, knowing that it’s fundamentally sound can make you more confident in holding it — especially if the price moves up and down.
Fundamental Analysis Cons
- Conducting fundamental analysis can take a lot of time, and it can be subjective. Many fundamental analysts reach different conclusions, especially when analyzing business models and company management.
- Fundamental analysis can be less useful for shorter-term trading, as markets are often driven by emotional fluctuations in the near term.
Technical analysts look at charts, price action, technical indicators, and trading volume to analyze a stock. They look for certain chart patterns and criteria that can help indicate what the stock price might do next.
Some traders use technical analysis to make trades without having a deep understanding of the underlying business. In fact, some use only charts to trade a stock — without knowing a thing about the company…
Let’s look at some key concepts, indicators, and patterns that technical analysts use.
Trends and Consolidation
When you break it down, stock prices do one of two things: trend or consolidate in a trading range.
When a stock price trends, it’s moving in a clear, consistent direction either up or down. Traders want to hold stocks that are in an uptrend, as the price is moving upward. And they either steer clear of downtrending stocks — or they short sell them.
An uptrend in a stock price is shown in the successive price swings — higher highs and higher lows on the chart. For a downtrend, the opposite is true: lower highs and lower lows.
When a stock price isn’t trending, it’s consolidating in a trading range. This is where a stock price has no clear direction but generally bounces around between two rough areas. To make money when a stock is consolidating, traders may open and close positions as the stock bounces between the two trading range levels.
The stock price on a chart isn’t random. It’s the total of all buys and sells. It shows the direct effect of trader and investor emotions.
Since human nature never really changes, traders can learn to spot patterns in stock charts. They use these chart patterns to gain insight into how a stock price might move in the future.
There are countless chart patterns out there, but don’t think you need to learn them all. A smarter approach is to pick a few patterns and master them. This post can help you get started.
Support and Resistance
There’s a saying in the trading community along the lines of, “if you can draw a line on a chart, you can make a profitable trade.”
The lines the saying alludes to are called support and resistance levels. These are the levels where the market historically either paused or reversed direction in price.
A support level is where the price rises — it’s supporting the stock price. A resistance level is where the price falls — it provides resistance to price.
Support and resistance can be found on all time frames, from multi-decade charts to multi-minute intraday charts. When technical analysts start analyzing a chart, often they start by marking key levels.
Apart from the historical stock price, charts often show a stock’s trading volume as well. Trading volume is the number of shares that were traded in a certain time frame — that depends on the chart settings.
Trading volume is often shown as a histogram on the bottom of a chart.
Analyzing trading volume can come with a number of benefits. First, it can help traders assess whether a stock is liquid enough to easily trade.
Trading volume can also give an indication as to the overall psychology of the market. For example, a stock breaking through a key level on high trading volume can indicate that the market is very excited … and the momentum could likely continue.
Pros and Cons of Technical Analysis
Technical analysis is a clear favorite of short-term traders, but many of the world’s top investors shun it in favor of fundamental analysis. Just like anything else, technical analysis has both pros and cons. Let’s check out a few.
Technical Analysis Pros
- Analyzing charts can go fast. That can help traders find and plan trades quickly.
- Technical analysis help traders find insight into where to enter or exit a trade or where to place a stop loss.
- With technical analysis, you see the same chart as every other trader or investor. You’re not handicapped with a lack of information.
Technical Analysis Cons
- With technical analysis, you often don’t have much understanding regarding the underlying business. So you may miss obvious flags that signal it’s time to exit a trade.
- With so many technical tools available, traders can often find themselves with analysis paralysis. They freeze up, not knowing which factors to trust or how to make a solid trading decision.
Technical vs. Fundamental Analysis: The Verdict
The point of this post is to help you as a trader decide which analysis technique is best for you…
I can’t really tell you that. The reality is that it depends on you and your trading style … And combining both techniques is probably the wisest move. I think all traders should do at least some rudimentary fundamental analysis of the stocks they watch and trade.
Technical analysis can then help you decide when and where to enter a stock, where to place your stop loss, and how to manage your position.
This is how I do it, and it’s how most of the successful traders I know do it. But again, it’s really about what helps you make informed trading decisions. The great thing is, you can make your own hybrid form of stock analysis … and you can do it all on the StocksToTrade platform…
How You Can Use StocksToTrade for Analysis and Trading
Whether you’re a technical trader, a fundamental trader, or a bit of both, StocksToTrade can help.
The StocksToTrade platform was created by a bunch of hardcore, real-world day traders who know exactly what it takes to battle the markets day in and day out…
With StocksToTrade, you have access to just about every stock traded on American exchanges … even OTCs and pink sheets…
You have premium, top-of-the-line charting, company profiles for fundamentals at the click of a button, news scanning, price action scanning, algorithmic trading, and so much more…
See why many of the world’s best day traders use our platform every day — get your 14-day trial of StocksToTrade for just $7!
There’s really no wrong or right way to analyze a stock. It depends on your personality, trading style, trading time frame, and so much more. End of day, you want to use any and every tool that can help you make smarter trading decisions.
If you’re new to the markets, try both technical and fundamental analysis to find what works best for you and your strategy.
Some of the best traders use a combination of both forms of analysis. That’s how we do it with StocksToTrade pro … We go for a hybrid of technical and fundamental analysis to analyze stocks.
StocksToTrade Pro is our elite trading community. It’s a place where you can grow as a trader. You can get access to mentorship, market analysis, active chat rooms, and educational webinars.
Time to improve your trading skills? Ready to do it with a group of like-minded trading peers? Join us today at StocksToTrade Pro!
What’s your favorite way to analyze stocks? Tell me in the comments below!