#40 How do you trade? Fundamental vs Technical Investing Style
I have always been a supporter of Fundamental Analysis for screening securities or investment themes. Never felt confident using technical analysis although I have practised multiple trading setups on paper currency.
Let us quickly discuss the two kinds of analysis widely popular for stock analysis:
What is Fundamental Analysis?
Fundamental analysis focuses on using the financial statements (Balance Sheet, Income Statement, Statements of Cashflow/Equity), macro and micro economic factors to come to the intrinsic value of a stock.
E.g. For a given company, you’d try to calculate the expected future cashflows (Capital gain or dividend) and discount it using a suitable discount rate.
A discount rate in a broad sense is the expected return that the lenders expect on the money invested.
What is Technical Analysis?
Technical Analysis uses the historical share price movements and uses time series analysis, patterns in the trend to identify entry and exit opportunities.
Eg. Invest when price goes below the last 30 day moving average and sell when it goes above the last 50 day moving average.
Who uses either?
Generally, for short term trade setups (intraday, swing) people use technical analysis and make quick wins. For longer term investments people go for fundamental analysis.
Both the fields have seen multiple academic and industry interests and it’d be tough to say that one wins over the other.
I’m sure there are some market efficiency factors that come in play that ensure the robustness of technical analysis. I would love to hear from the traders in my circle about your preferred setups.
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