Fundamental Analysis vs. Technical Analysis

If you 're new to buyting stocks, theres a lot to learn and the more you read and study, the better you'll get a handle on things.

For example, eventually you'll run across the concepts of Fundamental vs. Technical analysis. Sounds complicated but it's not.

Fundamental analysis is the study of the stocks and the companies themselves. Their value, their profitability, their earnings and price, their P/E ratios and PEG's and generally how strong a company is. It also includes how strong or weak the markets are in general, as well as sectors.

Remember sectors are the groupings of stock companies. The Food Industry sector, the Utility sectors, the Transportation sectors, the Medical sectors, etc.

Fundamentalists suggest the best way to buy stocks is to look how strong the company is financially and go from there. Are they making money? Are they coming up with new products? Are they growing? Sounds reasonable, right?

Not so fast, say the Technical Analysists.

"Tech-ies" (nobody else but me calls them that) believe that that's all well and good but thats not what the Stock Market is about.

Technical Analysis is the study of people and human behavior's influence on the Marketplace, that is, the psychology of trading. They believe human behavior is fairly constant and predictable enough that certain patterns and trends can be identified in the marketplace.

Technical analysis is more apt to look at charts rather than just a company's internal makeup. They look at "trends" to help them identify "buy and sell" points and go from there. They also look at earnings and split announcements and tend to keep an eye out for IPO's and such.

Day and swing traders are usually big on Technical Analysis. Long term investors tend to be more fundamental in their approach.

Technical Analysis is not a perfect science by any means. It's more of an art and "probability" is their cornerstone. They are more satisfied with taking a 5 to 8% "hit" and move on, rather than the 10-15% long term goals of the investor.

The truth is, both sides have something to offer the investor. Depending on your style and whether youre a "trader" or "investor," both sides are deserving of considerable study.

Certainly the technician would be well served to know how strong and profitable the company he or she is trading is, as it often makes a difference in the return of the trade, no matter how fast it takes place.

And the fundamentalist would be in a better position overall if he or she can read Candlestick and other chart styles in order to understand the language of the marketplace. Certain patterns like "Cup and Saucers (with a handle!)" or "Head and Shoulders" within these charts seem to matter. Or they at least can predict (again within some probablity) whether a stock goes up or down.

Like the farmer who tends his garden, knowledge and action lead to success. Study and research make a smarter investor and trader. Learn how to do both fundamental and technical analysis and the money will follow.