Fundamental analysis (FA) is the methodology used to evaluate the fundamentals of any asset class such as business. Valuation will be perform on the business by studying the balance sheet, income statement, cash flow statement, gearings, competitive advantages, management team and many other factors that might influence the prospect of the company to derive to an estimated value. The derived value and other factors will be use in the investment decision making process.
Technical analysis (TA) is the methodology used to determine the balance and the strength of demand and supply of a particular asset class such as company shares. Evaluation is perform on the historical data mainly price and volume to interpret the direction of the stock prices and also to project the future prices. It works on the basis that history tends to repeat itself. Key concept of technical analysis would be the direction of trend and also the support and resistance level. As commonly phrased by any TA practitioner, the trend is your friend.
The common question and dilemma of a beginner trader or investor is to whether to use fundamental analysis or technical analysis in their stock picking. That is one million dollar question. The quick answer to that would be it depends on individual.
Hold your fire. This is one of the most controversial subject in financial market. There are many market experts and champions in both fields. Most FA practitioner would call TA practitioner a fool and vice versa. I have been in both fields and have seen both potentials and capabilities as well as their limitations. I would ask you to hold your thoughts open to both FA and TA. I started off in FA and shuted down to TA after some experts in FA mocked TA as foolishness. However, life led me to begin explore the wide range of subjects related to financial market such as TA and other unconventional methods and to my surprises that many of them have their validity. Keep your ears and hearts open.
I would recommend to choose one and stick with it. Only when you are comfortable you would then like to explore the other subjects. Passion is the key as it would require great deal of time and effort to learn both. Still to the general public I would recommend one and stick with it if you have some success in it. Not all are suitable to be FA or TA. It depends on personality. Some would be more suitable to be passive investors while some active traders. Don’t get me wrong…there are active investors and passive traders too.
There are other methodologies in analyzing the market and some of the methods are unconventional and seems controversial to many. However as mentioned earlier, keep your ears and heart open. I shuted mine years ago only to discover later that there are certain validities to the other methodologies. I will discuss and talk of them in the future.
Stay tuned.
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Fundamental Analysis is more sound for making medium to long term investments, the likes of Buffett and Graham prove that using fundamentals for value investing can generate returns that consistently beat the market.
Hi Finance Section, thanks for dropping a word of your thoughts. True, Warren Buffett had proven himself and fundamental analysis by his title of world richest guy. No one in financial market has ever get so close to where he is now. Warren Buffett was not only a value investor but more so a growth investor. Like what he said before, he was 15% of Benjamin Graham and 85% Philip Fisher.