Chris Rowe

The Answer to the Age-old Question: Fundamental vs. Technical Analysis?

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Before we get into a debate over the merits of technical analysis versus fundamental analysis, I must tell you that, hands-down, I am a fan of technical analysis.

The main reason for this is because technical analysis allows me to get the clearest picture of where the stocks I want to trade are heading. It also strips out the emotion when choosing when to enter and exit positions.

I'm sure you've heard the phrase, "The charts don't lie." These are words to live by.

Many of you are probably new to reading -- and, more importantly, understanding -- charts. (If you're one of those people, check out 10 Tips to Getting Started With Technical Analysis.)

If that's the case, you might be relying on other factors like companies' earnings and product lines and other research you might do before you decide whether to jump in (or out). You might not have realized it, but you've been doing fundamental analysis.

While I personally prefer one over the other, there is a place in the investing universe for both. So we'll take a look at how to integrate fundamentals and technicals into your portfolio.

What's Behind a Stock Ticker?

When we analyze a company, we use fundamental analysis. When we analyze a stock, we use technical analysis.

A "trader" is more likely to use technical analysis because it is known to more accurately assist in predicting the shorter-term moves of a stock.

A longer-term "investor" is more likely to use fundamental analysis because it gives a clearer picture of the longer-term potential of the underlying company behind the ticker symbol.

Both forms of analysis are the study of trends, and they are only as good as the individual who is interpreting them.

2 Ways to Look at the Bigger Picture

While you can closely follow and profit from current market trends, fundamental analysis is equally as important as technical analysis.

For instance, I'll go long on a stock when I see that the bulls are in control and the volume is moving higher with the price of the stock. However, I position myself in the companies that have fundamental strength that back up the price movement of the stock. 

The two forms of analysis should act as two partners running a profitable business. Or, to throw another analogy at you, they are like swordsmen with their backs to each other, fighting a large group of enemies. One has to trust that it can rely on the other to protect his back.

People often lose sight of the fact that there are upward of 10,000 stocks to choose from when deciding which ones to trade. It is important not to settle for stocks that don't have the fundamental strength that we look for.

However, I wouldn't recommend trading on fundamentals alone.