Your investing strategy will have a lot to do with what kind of investor you are. Are you the kind of person who looks at the hard numbers, searching for patterns and indicators? Or are you more of an underlying pattern sort of person, looking at the big picture? Or do you do a little of both? If you are going to start investing, it helps to know what kind of style you have, and there are two main investing styles: one that uses fundamental analysis and one that uses technical analysis. Whether you invest in stocks, bonds or currencies, knowing the difference between these two styles can help you formulate your investing strategy.
Fundamental analysis is all about the “big picture.” Rather than looking exclusively at charts and indicators and how a stock or currency is doing now, fundamental analysis considers such “fundamentals” as management style (of a company) and overall economic growth (involving a currency). Fundamental analysis demands that you look at subjective factors such as potential for growth, possible movements in the future (such as a merger, or an interest rate increase). Additionally, current events like political instability or a management shakeup can influence the fundamentals. These are things that a fundamental analyst looks for when making investment decisions. Fundamental analysis is popular among long-term traders.
Technical analysis, on the other hand, is all about what’s happening now. It involves looking at charts and seeing what the indicators are. It means that you need to be versed in what “support” and “resistance” are (a subject for another post), and what the movements mean. Technical analysis looks at what is happening now, and what has happened in the recent past to build investing strategy and make a plan for the future. Rather than looking at overall trends in general, technical analysis is concerned almost exclusively with price trend. What management is doing does not matter; what the price is doing is everything. Technical analysis is popular among day traders who make short-term moves.
Combining the two
Obviously, there are few people who are exclusively in one camp or the other. Most fundamental analysis people will take into account prices and look over the price movements in a cursory kind of way. They just don’t base their entire investing strategy on price movement alone. And, of course, many people who use technical analysis also look into the underlying factors that cause price movements. They just don’t put a lot of faith in the potential growth of an investment based on what might happen in the future if the new management does such-and-such a thing.
You can find the right mix to fit with your investing strategy by determining how you want to invest, and by understanding that research goes into both investing styles. The important thing is to find the right combination of fundamental analysis and technical analysis to fit your needs and help you feel comfortable with your investing strategy.