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Fundamental or Technical Analysis: Which Should You Use?
There are two main methods in stock selection: fundamental analysis, which looks at a company's financial health, and technical analysis, which looks at price charts. Both have strengths and weaknesses.
What Is Fundamental Analysis?
It aims to calculate the true value of a company. The income statement, balance sheet, cash flow, peer comparison and sector trend are examined. Metrics such as P/E, P/B and the EV/EBITDA multiple are used.
It is more suitable for long-term (1–5 years+) investment. Legendary investors such as Warren Buffett and Benjamin Graham represent this approach.
What Is Technical Analysis?
It aims to predict future moves from a stock's past price action and volume data. Indicators such as support/resistance, trend lines, RSI and MACD are used.
It is common for short-to-medium-term (day/week/month) trading. The main tool of day traders and swing traders.
Which Is Better?
Academic literature shows that fundamental analysis delivers more consistent results over the long run. Technical analysis can be useful for short-term timing, but investing based on technical analysis alone statistically fails to beat the index most of the time.
A balanced approach: decide which company to buy with fundamental analysis, and decide when to enter/exit with technical analysis.