Fundamental vs. technical analysis
Fundamental analysis asks what something is worth. Technical analysis asks what the price is doing right now. Both answer different questions and suit different time frames.
Fundamental means: you look at the company. Revenue, profit, debt, competition. From that, you estimate what it's worth, and compare against the price.
Technical means: you look only at the price. What has it done recently, where were the turning points, how much was traded. The company itself doesn't come into it.
Both have their place. Fundamental works for long time frames, since price tends to track a company's condition over time. Technical targets short time frames, where sentiment and positioning dominate.
One thing you absolutely need to know: technical analysis is contested, and a lot of its claims don't hold up under scrutiny. It isn't a science, it's a collection of observations of varying quality. In this stage, you'll get to know it while also learning where its limits are.
Fundamental analysis derives an intrinsic value from expected cash flows and compares it against the market price. Its weakness lies in sensitivity to assumptions: small changes in growth rate and discount rate produce large valuation swings, which is why a calculated value is more of a range than a number.
Technical analysis assumes that information and expectations get reflected in price and volume, and that patterns repeat. That assumption sits in tension with market efficiency in its weak form, under which historical prices can't produce excess returns. Empirically, studies find statistically robust effects for a few specific approaches, momentum in particular, but hardly any for the bulk of classic chart patterns.
For retail investors, the practically important distinction isn't between the two schools, it's between testable and untestable claims. A rule that can be clearly formulated and tested against historical data can be evaluated. A claim that only becomes clear in hindsight can't, and that's exactly the property many chart patterns have.
Summary
- Fundamental asks about value, technical asks about the price path.
- Fundamental works long-term, technical targets short time frames.
- Testable rules can be evaluated; patterns only clear in hindsight can't.
Did you get it?
What is fundamental analysis's main weakness?
Sensitivity to assumptions about growth and discount rate. The result is a range, not a number.
Which technical approach holds up best to empirical testing?
Momentum. For most classic chart patterns, the evidence is weak.
Which distinction matters most in practice?
Between testable rules and claims that only become clear in hindsight.
Related
- What a company is worthStage 3
- Trendlines and channelsStage 3
- Order typesStage 1