Fundamental analysis is the term for trading stocks based upon factors inherent to their underlying companies. Such factors as corporate earnings expectations, backlog of orders, balance sheet, and cash flow, for fundamental analysts, provide indications as to whether the stock is overvalued or undervalued, which in turn leads to a decision whether to purchase, or perhaps short, the stock.

Fundamental analysis can serve double duty for stock traders, as the same techniques can be used to examine an industry sector to determine its overall direction, prior to narrowing the examination to individual companies within the sector. Such flexibility is especially useful to while diversifying as a risk management strategy.

Technical analysts, on the other hand, sometimes don’t even know a company’s name, much less what product it sells. Their trading decisions are made entirely upon the stock’s price movement within the market, as shown on the stock’s chart. Technical traders analyse the chart, determine what the stock price may be at some future point in time based upon technical factors, and place a trade to capitalise on that forecast.

Technical factors include chart patterns, indicators, candlestick patterns and signals, trendlines, and support and resistance levels. These factors are based upon mathematical calculations and strict modelling criteria. The best technical analysts memorise these factors and criteria, apply their complexities to stock charts, and draw their trading conclusions, and sometimes their livelihood, from this skill.

Nevertheless, technical analysis remains more popular amongst stock traders than fundamentals, particularly amongst newcomers to trading, for several reasons:

•    It requires much less work and time. For correct stock evaluation purposes, a fundamental analyst must understand a company’s industry sector dynamics, its competition, financial basis, management team, and so on. As well, such an understanding must be formed for each sector and company the trader uses for diversification. Technical analysts, on the other hand, need only learn one effective trading technique, which can then be applied to any chart.
•    Fundamental analysis is more subjective than technical. Any mistaken assumption or emotional bias in fundamental analysis can skew the results received, unlike technical analysis, which is based upon strictly numerical values.
•    Trades based upon fundamental analysis require more time to develop than those based upon technical factors. It’s one thing to realise a company’s stock is undervalued. It’s another to wait for the rest of the market to notice and do something about it, a process that may require months or even years. On the other hand, chart patterns and indicators can sort themselves out and deliver clear trading signals in mere days or weeks.

Most successful stock traders utilise some combination of technical and fundamental analysis for trading, simply because such a combination is the best guide to profits through any stock market. An individual stock performs best when corporate fundamentals align with technical patterns and indicators, giving this sort of balanced trader an edge over the competition.

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