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There are generally two ways that investors perform analysis on stocks they are considering for investment. These two disciplines are known as fundamental analysis and technical analysis and they come at the same problem from two distinctly different angles.
First there is the traditional route of fundamental analysis. This is performed by measuring all kinds of metrics regarding the performance of the underlying company. These metrics are typically represented by various ratios or derived by formulas. They include things like looking at the company’s discounted dividends (using the discounted dividend model or DDM), return on investment (ROI), price to earnings ratio (P/E), return on equity (ROE), free cash flow (FCF), return on assets (ROA), price to book value (P/BV), weighted average cost of capital (WACC), as well as a SWOT analysis of the firm. (A SWOT analysis is an in-depth analysis of both internal and external factors that may affect the long-term performance of a firm. It is named after the four factors of Strengths, Weaknesses, Opportunities, and Threats.) Fundamental analysts also take a good look at the management team that is in charge of the firm.
On the other side of the equity analysis spectrum lie the technical analysts. They are sometimes called chartists due to their heavy reliance on stock charts to make investment decisions. Technical analysis assumes that asset prices already have all available information that fundamental analysts follow funded into their prices and therefore the best use of an analyst’s time would be to identify certain patterns in the trading for an individual asset. Technical analysts make use of such things as trading volume levels, candlestick charts, moving averages, Bollinger bands, support and resistance lines, and momentum oscillators to inform their decisions.
Most investors benefit from a combination of both fundamental and technical analysis, though some choose to rely solely on one or the other and staunchly oppose the other camp’s viewpoint.
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How does technical analysis differ from the fundamental analysis?
Technical vs. fundamental analysisThe primary difference can be summed up in terms of both the underlying philosophy, and the data studied. Fundemental analysis is concerned chiefly with discovering asset values. The data relied upon includes off exchange sources such as balance sheets, income statements and supply and demand statistics.Technical analysis on the other hand, is concerned chiefly with the timing of buy and sell decisions. The data studied is generated exclusively by the exchanges.Where does investor sentiment fall within these two definitions? If the sentiment data is derived from options data, then it would fit the definition of technical analysis. If on the other hand the data was generated by opinion polls, then it would not fit the definition of technical analysis. Nor would it be considered fundamental analysis either. It would more properly and simply be defined as "sentiment analysis."While there is some debate over whether off-exchange data (e.g. astrological data, dividends, opinion polls, etc.) properly belong under the definition of technical analysis, none of the main organizing bodies for technical analysis have ever rendered an official, public opinion on this question.According to noted technical analyst Daniel Chesler, CMT --"Technical analysis is the forecasting of markets through the study and analysis of data generated exclusively from the buying and selling of financial instruments. It is part science and part formalization of trader intuition and experience. Any market for which there is a regular, transparent transaction history is a candidate for technical analysis. Planetary cycles, opinion polls, fundamental, monetary and economic data as well as any data not specifically generated from the buying and selling process, are not a part of orthodox technical analysis."
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