The Pros and Cons of Fundamental and Technical Analysis

Most forex technical traders are not very concerned by a company’s competitive position when they are trading stock. What seems more valuable to them is the price trends of the stock and identifying the best time to enter or exit a trade.

However, this method can only work when you expect short-term gains from stock. Long-term investment in a company requires you to analyze its value by analyzing the environment within which it operates to know the stock’s intrinsic value and how much it will be worth in a couple of years.

Advantages of Fundamental Analysis

Investing during a market bubble could enable you to rack in cash in the short term, but in the long term, buying stock during a financial bubble could lead to a massive loss in investment. So, it’s essential to identify a market bubble through fundamental stock analysis, especially if you intend to invest in the company or stock for the long term.

If you want to make the most significant profit as a trader, it is essential to learn to make correct choices when everyone else is wrong. One of the best ways of doing this is through fundamental analysis of stock before investing. You have a higher chance of being correct over the long term when you make decisions based on fundamental analysis.

This analysis allows you to manage the portfolio risk by calculating the premium to fair value at which the stocks are trending. It also allows you to make asset allocation decisions to reduce the potential downside of a portfolio.

Disadvantages of Fundamental Analysis

As much as fundamental analysis is an essential analysis method, it is also good to acknowledge its drawbacks. One of the most significant drawbacks of fundamental analysis is that it is time-consuming. To get accurate data enough to make an informed long-term decision, you need to study a company one by one in detail.

Moreover, most of the information used to make this type of analysis is also widely available to other investors. To get an edge in the competition, you need to find a unique dataset that is not readily available to other investors.

This analysis method is also quite limiting if you want to make a short-term decision over a stock. Financial statements cannot show price movement and volatility. Moreover, some aspects of fundamental analysis, such as discounted cash flow model, are based on numerous assumptions which may not always be correct; factors such as target valuation are also not very accurate, especially if you are evaluating the value of a company or property for more than two years into the future.

Pros and Cons of Technical Analysis

One of the most significant advantages of technical analysis is that it can be done relatively quickly. Some tasks can also be automated, which saves time used in analyzing the value of the stock. Technical analysis also allows you to create investment strategies through clearly defined risks and reward profiles.

Several factors affect the price action of stock that fundamental analysis cannot identify. However, the effects of market sentiment, supply and demand, and market psychology can all be identified from a chart. This information can help you make informed short-term investment decisions.

With technical analysis, you can improve the timing of your trade strategies according to appropriate market conditions. This type of analysis improves hedging strategies by giving you accurate timing when buying or sort selling options. You can also tell whether a stock price is in a trend or a trading range.

Disadvantages of Technical Analysis

Although some technical approaches can be back-tested, most trading approaches cannot. Most of the tools used for analysis, such as the Elliot Wave, pattern trading, and other forms of technical analysis tools, are based on judgment. Their subjectivity makes it challenging for one to form an accurate and reliable assessment. Moreover, reading the figures and patterns of a chart is considered an art rather than a science, and hence one needs the talent to make an accurate judgment.

Charts are volatile. They often appear different over a short period. Moreover, traders use different trading methods. Hence, two technical analysts could come up with very different conclusions about the same stock in a particular duration of time. Short-term investments also yield little profits. So, to set up profitable investments, one needs to make an accurate analysis of a large number of trades.

Bottom Line

I hope this brief analysis will help you weigh your options on which method best fits your trading style and investment needs.

 

 

Most forex technical traders are not very concerned by a company’s competitive position when they are trading stock. What seems more valuable to them is the price trends of the stock and identifying the best time to enter or exit a trade. However, this method can only work when you expect short-term gains from stock.…

Most forex technical traders are not very concerned by a company’s competitive position when they are trading stock. What seems more valuable to them is the price trends of the stock and identifying the best time to enter or exit a trade. However, this method can only work when you expect short-term gains from stock.…