In the final part of our “how to become an expert trader” series we are going to discuss fundamental and technical analysis. Analysis is extremely important in the world of trading. Especially after you have made a trade.
The idea is to use the analysis from each trade to learn from both your successes and your mistakes. This way you will increase your chances of picking winning stocks on a more consistent basis.
Fundamental Analysis vs Technical Analysis
When it comes to analysis in the stock market there are basically two forms. Fundamental analysis and technical analysis. Fundamental analysis is when you base your investment decisions on a company’s overall earnings.
This would include sales, profit margins, earnings growth over the last three years, earnings per share, return on equity and debt to name a few. Looking at these key factors will help you narrow down the highest quality stocks.
Technical analysis on the other hand is all about reading charts and researching volume trends. With technical analysis you must time your decisions just right if you want to make a profit.
Here are 3 key differences between the two:
With fundamental analysis the core purpose is to produce a value that you as the investor can use to compare the current stock price of the company you are interested in investing in. That value will determine if you will buy, sell or hold.
With technical analysis there is no buy, sell or hold. You literally have to pounce when the time is right.
Fundamental analysis is also very dependent on what takes place in the economy. That means if interest rates are going to change chances are your decision about a particular stock will also change.
With technical analysis what’s going on in the economy doesn’t matter one bit. All that matters is the trend the stock is following, not whether or not interest rates are increasing.
With fundamental analysis the focus is always financial ratios and numbers. With technical analysis the focus is always historical price movements.
When it boils down to it both forms of analysis can be extremely beneficial to your overall trading strategy.
Just ask any seasoned investor and they will tell you the biggest key to making big money is being able to buy the best companies at the right time. In order to do that you must understand the company’s profit margins, debt, current stock price, previous stock price and any support or resistance lines.
All of this information can be obtained through a combination of technical analysis and fundamental analysis.