Page 50 - Trading #101 Course – Part One: Trading Basics

TRADING #101 COURSE – PART ONE: TRADING BASICS /2017-10-06

Chapter 8:

Technical Analysis & Fundamental Analysis

When analyzing a financial market, we usually isolate our analysis into either
fundamental or technical analysis. It’s like when one talks about investors versus
traders. Investors tend to rely on fundamental analysis, whereas traders tend to rely on
technical analysis.

Definition of Fundamental analysis:
Analysis of published data that is widely recognized as the fundamental “facts”. This
There may include be a variety of information, including corporate data such as
earnings, growth rate, price-/earnings (P/E) ratio, and debt- /equity ratio, etc. Equities
are also affected by economic reports such as unemployment, retail sales, and interest
rates. For markets other than equities, the data may include weather reports that affects
crop prices, political developments that affect currencies, and so on.

Definition of Technical analysis:
Analysis of historical price and volume patterns in the financial markets. These patterns
are used to determine probabilities of future activity. Basically, this analysis is using the
past to predict probabilities of what future market activity will be. The analysis interprets
actual buy and sell activity in the market, or current sentiment, and determines if the
patterns are like prior patterns and can indicate probabilities of future activity.
To give you some perspective, let’s contrast this with fundamental analysis. As the
name suggests, this approach examines companies in light of their fundamentals: their
balance sheets, income statements, cash flow, quarterly earnings, price-to-earnings
ratio and other quantitative measures of a firm’s financial health.
Fundamental analysis also encompasses less tangible qualities: how competitive a
company seems in its industry, the quality of its management team, and so forth. The
premise is to buy stocks of companies that are currently undervalued by investors using
these measures.

Technical analysts, by contrast, don’t necessarily believe fundamental analysis can help
them find a diamond in the rough. Technical analysis assumes all pertinent information
about a company is known and therefore “priced in” to a stock’s current value, including
fundamental data. By using the price action and volume of a security, technicians draw
conclusions as to the trends of supply and demand.

50 | P a g e