Fundamental Vs Technical Analysis: Which Should You Use?

Fundamental Vs Technical Analysis: Which Should You Use?

When you decide that you want to enter a position in a financial market, it can be overwhelming to figure out what is best for you. When only considering the stock market, there are approximately 41,000 different companies that are publicly traded. Then, once you find a company that you are interested in entering a position in, you have to decide if you want to take a position that is either bullish or bearish (you can read an article about the differences between call vs put options here).

Figuring out all of this can be immensely difficult and it may feel as though you are randomly throwing darts at a board to figure out how you should proceed. However, there are two main types of research conducted to help with this: fundamental and technical analysis. But what are fundamental analysis and technical analysis and how do I know which one I should use?

What Is Fundamental Analysis?

Fundamental analysis is the judging of securities by looking at the business's intrinsic value. The intrinsic value is the true value of the business as opposed to the market value, or the company's market capitalization, which could be higher or lower than the business’s actual value. The stock price of said company hypothetically should reflect the company’s value divided by the number of shares, however, securities are priced based on market supply and demand.

Unusual Whales provides information about a company on their company profile page. An example of this can be seen below about Amazon ($AMZN, NASDAQ).

Amazon Company Page

The fluctuation of a company’s intrinsic value, or the perception of it, is what causes its stock price to move up and down.

Trading Vs Investing Defined

The main difference between trading and investing is the time frame in which your position occurs. Investing is generally defined as when your position is held for a year upwards while trading is anything below that. There are multiple types of trades, such as day trades (entering and selling a position on the same day) and swing trades (holding a position for multiple days/weeks).

Trading Using Fundamental Analysis

Given the short time frame of a trade, most trades using fundamental analysis involve taking positions given a news update. There are three main types of news alerts that can shake a stock’s price: company-specific, sector-specific, and overall market. For any given type of news, Unusual Whales provides a live news flow that can be found here.

Unusual Whales' News Flow

Company-specific news updates typically, but not necessarily, will only change that specific company’s stock price. Common news updates that can occur include earnings reports/announcements and leadership position changes amongst others.

News updates such as earnings that are company-specific can sometimes be used to help create educated hypotheses.

Just as the name suggests, overall market news alerts affect the whole market. The best example of this is the infamous COVID-19 stock market crash of March 2020. While COVID first originated in late 2019, it was not until March that this disease infiltrated the United States, causing mass panic and causing the entire nation to go into lockdown. This turn of events affected the entire stock market and on March 23, 2020, the SPDR S&P 500 ETF Trust ($SPY NYSEARCA) closed at $222.95. For reference, $SPY, which is widely regarded as one of the best ways to gauge market health, closed the first trading day of March at $309.09.

Investing Using Fundamental Analysis

One of the most popular and common fundamental analysis strategies used when considering an investment is the discounted cash flow model (DCF model). Widely viewed as one of the more accurate portrayals of a company’s intrinsic value, the DCF model values the current value of a possible investment by using predictions of the business's future cash flows, the amount of money in movement entering, and leaving the company during its operations.

News flow is also a strategy undertaken by investors with regard to their investments. While investors may not care as much about the day-to-day price movements of their long-term hold, news such as the COVID-19 stock market crash will definitely force them to take a look at their long-term assets.

What Is Technical Analysis?

Technical analysis is the analysis of a company based on its charts and historical data. Users of technical analysis look for patterns in the stock’s price chart to try to create educated theories of what the stock will do next.

Trading Using Technical Analysis

If you are trading using technical analysis, you are looking to capitalize on the short-term price movements of the stock. Due to this, you are most often looking at charts with shorter time frames, such as the one-minute chart for day trades taken within the first hour of the market being open or the daily chart for swing trades.

The chart has many identifiable characteristics to make a trading hypothesis on with one example being candlestick patterns.

A stock’s chart will typically have its price movements expressed in one of two ways: line graph or candlestick graph. Most savvy traders will use candlesticks as opposed to lines because candlesticks not only display important information but also have identifiable patterns that often tend to repeat.

A candlestick by itself presents four pieces of information: where the stock opened, the lowest price point, the highest price point, and where the stock closes. A candlestick represents the time frame that you have your charts set to, such as the one-minute or thirty-minute charts previously mentioned. Candlesticks are also easy to look at as their color scheme makes it easy to identify how the stock did during the specified interval. A green candle means that the stock went up during the time frame while a red one means it went down. Unusual Whales provides charting for any stock ticker on the company page.

Amazon Chart

While looking at a candlestick by itself presents you with incredible information, it is the analysis of multiple candlesticks together that the most profitable traders use to figure out what they will do.

Investing Using Technical Analysis

Investing using technical analysis is similar to trading strategies, with the only difference being the time frame being analyzed. While traders will use short-term intervals like the one-minute chart that was previously explained, long-term investors will look at the weekly and monthly charts to determine how they wish to proceed.

Which Should You Use?

Ultimately, you should use whichever method you are most comfortable with and what has helped you the most as a trader/investor. If you have only used one of these, it is worthwhile to try to learn the other way as the best traders are able to use fundamental analysis and technical analysis in unity as they search for profitability.

In your search for profitability, regardless of which one you use (or both!), Unusual Whales provides the retail investor with a plethora of tools to help aid you in your goals. You can find out more here!