What is technical analysis?
Technical analysis is the study of charts. In these charts will be historical prices,
the volume of trading activity and a number of indicators that help determine trends,
ranges and overbought/oversold levels. (Note: We’ll be going over all of this in
detail later on.)
What is fundamental analysis?
How is technical analysis different from fundamental analysis?
While fundamental analysis may tell you when you’ve found a solid company, its weakness
is getting you into that stock on a timely basis as far as when to enter and exit
the stock. This is where technical analysis comes in. Its great asset is that it’s
a better timing tool. So the fundamentals tell you “what” to buy and technical analysis
tells you “when” it might be a higher probable time to buy and sell that stock.
As you can see from this, they both can be complimentary to one another. After all,
if you can trade a stock with horrible earnings or a stock with favorable earnings
projections, of course you should trade the one that’s more fundamentally sound.
Someone who strictly uses fundamental analysis may need to hold on to that stock
for 3-10 years for the true valuations to be reflected in the stock. These tend
to be long term investors. The trader, on the other hand, tends to lean more heavily
on technical analysis because the trader has to be right within hours to weeks,
not 3 to 10 years. To the technician, timing is of the essence.