Options Trading System

Technical or Fundamental Analysis

There are two types of the analysis used by institutional and individual traders. Both fundamental and technical analysis serve the same purpose to help to define possible future stock trend, yet, at the same time they are completely different in the way they analyze stocks. Both fundamental and technical analyses are important and depending on the trading style one or another could be applied. Before answering on the question which one to use, let us define a few main points about these types of stock analysis.



In the core of Fundamental Analysis lies collecting of all possible information about a public company. As a rule this is quote a big volume of info which includes earning reports, company spending reports, finding out about future company's products, gathering information about the industry in which the company operates, etc. In many cases several years of information should be collected and analyzed to evaluate the stocks of the company and make an assumption about health of the analyzed stocks. In many cases the result of fundamental analysis has to answer if the company stock is overpriced (current stock price is above the price that should be based on the company assets, good will, earnings, debt and other factors) or the company stock is underpriced (current stock is traded below the price that should be based on the company assets, good will, earnings, debt and other factors). Other important question that could be answered by fundamental analysis is about prospective of the company and what is potential of the company to grow. Fundamental analysis is quite complicated, expensive and time consuming, yet, sometimes this is the only way to find out the current situation about the company and if it is worth to invest in the company's stocks.

Technical analysis on the other hand is easier to learn, easier to use, could be less time consuming and less expensive. Technical analysis looks at past performance of an analyzed stock in order to find logical patterns that could be applied to the current situation on the market and reveal possible future stock trend. As a rule this type of the analysis is based on the analysis of the volume and price charts, data, developing various technical indicators which. In the age of the computerization many of the traders are choosing this type of the analysis mainly because of the availability and fast results.

By comparing technical and fundamental analysis there is no straight answer which one of them is better. However taking into account different traders we may say that:

• For intraday traders: if a trader intends to make 1-5 trades a day, most likely, they do not care about fundamental analysis at all. It does not matter to intraday traders what is going to happen to the company over the month, is it on the edge of filing bankruptcy or it is strong and growing. All they are interesting in is how volatile and how liquid stock is and where the price of the stock is going to be in 10-30 minutes. These traders rely solely on technical analysis.
• For Short-Term Traders: The same as intraday traders this type of trading does not assume holding position (own stocks) for a prolonged period of time. 1-2 trades a week and even 2-3 trades a month is still a small timeframe to be bothered by complex fundamental analysis.
• For Mid-Term Traders: By going into 2-3 trades a year a traders may start to be interesting in some elements of the fundamental analysis. By holding a stock for more than 6 month in your portfolio you suppose to know at least a little bit about the company. You still may use technical analysis, yet some company research could be recommended for this type of traders.
• For Long-term Traders: If you intend to hold the stock of the company in your portfolio for a several years it becomes essential to consult fundamental analysis. Those who trade indexes still may use some elements of technical analysis, yet, when it comes to stocks you have to be sure it is not broken when you are willing to sell it and has at least the same value so you do not loose.

In summary as you may see that fundamental analysis is useless when it comes to speculators who make short lived trades and it becomes more attractive to long-term traders. On the other hand technical analysis is very popular among short- and mid-term traders. Even long-term traders use some technical indicators especially when it comes to technical analysis applied to the indexes and exchanges.