Technical analysis and fundamental analysis are different methods of determining if a security should be purchased or not

Technical analysis and fundamental analysis are different methods of determining if a security should be purchased or not

student post 1:

This is my favorite discussion yet because I had no previous knowledge of the CMT certification, but a huge interest in technical analysis. The first way I learned to trade was through technical analysis. One of my favorite “Twitter Traders” goes by the handle @TraderStewie and works fully in technical analysis. From him I learned the basics like a bullish falling wedge, a double bottom, or a cup and handle pattern. (images provided below)

Other basics of technical analysis involve understanding moving averages, RSI, candlesticks, and divergence. A big assumption that goes along with technical analysis is that historical patterns in the stock market will repeat itself. This is how technical analysis relates to behavioral finance. Charts allow us to see how traders and investors have reacted to certain price action within a stock. In fundamental analysis, historic data is used frequently but it is acknowledged that it cannot predict future prices. This is one of the larger differences between fundamental and technical analysis.

As I matured as an investors, I learned a couple things about technical analysis. 1) It is not full proof, 2) it can be used against you, and 3) it is a compliment to fundamental analysis, not a replacement. It is not full proof meaning, it does not work 100% of the time, just like everything else in investing. It can be used against you by firms with higher buying power to try to predict your moves and profit from it, which will sometime end up with you taking the loss. The last observation I had about technical analysis may be the most important and it totally my opinion. There are many schools of thought on this subject, but I believe that fundamental analysis decides which stock you should buy and technical analysis decides at what price you should buy and sell the stock at. A course on CME Group’s website states, “technical analysis and fundamental analysis are many times combined to give the trader of a bigger picture view of the market. There are many traders who will build pricing models and then look at charts to confirm their assumptions or fine tune entries and exits.”

I am actually very interested in receiving a CMT certification, so I am more than happy to hear your thoughts on this subject and have a discussion.

student post 2:

Technical analysis and fundamental analysis are different methods of determining if a security should be purchased or not. Technical analysis involves using historical statistical data of a stock for instance, to determine the future direction of the price. This is done by “analyzing statistical trends gathered from trading activity, such as price movement and volume” (Investopedia). I look at this method as putting trust in historical data – given this scenario, anything can happen. For instance, boom, a pandemic. Although it did not happen over night, there are many global, environmental etc., events that could happen and disrupt any future performance predictions. How long an investor plans on holding the stock would matter as well, the longer, the more riskier for fluctuation from the prediction.

Fundamental analysis is a completely different approach, involving deriving an analysts own share price (intrinsic value of stock) and then comparing it to that of the markets value, to overall determine if a stock is undervalued or overvalued. This involves trying to measure a stocks intrinsic value by examining many different factors. Analysts usually work from a macroeconomic standpoint to a microeconomic standpoint, examining factors such as the state of the economy, and industry, down to the company’s management (Investopedia). Where as, “technical analysis assumes that a security’s price already reflects all publicly-available information” (Investopedia), which is why historical data is used to forecast future stock prices.

To summarize, both are used to forecast future stock prices – they are completely different methods and could arrive at completely different outcomes. Where I have not experienced either method – I think using both methods could be used as risk a reducing approach. Although using both methods would be a time intensive approach, it would could be worth it – both methods deriving the same result would be assuring to an investor or analyst. I find both methods very interesting in their own ways.

Behavioral finance can stir things up a bit – it’s how psychological influences and biases of investors can affect the market outcomes and returns (Investopedia). There are several different biases and concepts to do with behavioral finance – Emotions get in the way of individuals making rational decisions and in this case investing, which could end up bad for them. Emotional biases and other biases and influences could be the main cause of a spike or fall of a stock, which really affects the market and the technical analysis approach mentioned above. Do you agree? Interested in reading others thoughts on this.