If you’re just learning how to start trading, there are a plethora of analysis tools out there. In general, fundamental analysis and technical analysis are at the forefront of trading and investing. Additionally, some analysis tools may take a quantitative approach, but we won’t get into the details of all of that. We’re primarily focused on fundamental and technical analysis at Raging Bull.
Before you decide which camp to join, you should understand that sometimes fundamental and technical analysis go hand in hand. For the most part, traders at Raging Bull look for catalysts that could potentially change a company or industry, as well as charts. That said, let’s take a look at the difference between fundamental analysis and technical analysis. It’s important to understand these two types of analysis before you start trading stocks.
What Are Fundamentals Vs Technicals in Analysis?
In stock trading, you need to be able to make informed decisions based on researching different companies and factors in the market, hence learning analysis. But how are these two forms, fundamental versus technical, different?
First, fundamental analysis means studying the core essentials for a business; the absolute basics that determine financial health and prospects. How much is the company earning? How much is it producing? How about price-to-earnings or price-to-earnings-growth? These kinds of factors all fall into fundamentals analysis. If a company seems to have good fundamentals and it’s stock price might rise, it may be worth buying before that happens. If a company seems to be in trouble, it might be worth selling any of its stock you’re holding or buying stock to short it later.
Now that fundamentals have been cleared up, what about technical analysis of the financial markets? Instead of studying basic company health indicators, technical analysis is all about studying particular statistics related to the company’s stock. Technical analysis includes things like price movement, past trading activity, volume, momentum, moving averages, and support and resistance numbers. Technical analysis usually follows the philosophy that the market moves in predictable motions, and that studying how a company’s stock performed in the past can show how it’s likely to behave in the future.
To put it very simply, you can equate fundamentals analysis vs technical analysis as choosing whether to focus on good-looking companies or good-looking stocks. Fundamentals are all about studying an actual business to see if its stock is worth trading, while technicals relate solely to the stock itself, not the business.
Start Trading: Fundamental Analysis vs. Technical Analysis
When you start trading stocks, you’ll need to find a type of analysis that best suits your personality. For example, if you’re more of a visual trader, you’ll probably want to use technical analysis, primarily. On the other hand, if you like analyzing a company and whether it’s undervalued based on calculations, you’ll probably opt for fundamental analysis. Moreover, those who are math and computer science savvy might look to use quantitative analysis.
Start Trading: Fundamental Analysis
Again, fundamental analysis deals with intrinsically valuing a company, looking at all aspects of the industry and the company. When you use fundamental analysis, you would look at a company’s financials and some simple formulas. For example, you’ve probably heard someone reference P/E before. The price-to-earnings ratio (P/E) is widely used by traders and investors. Fundamental traders and investors will typically compare a stock’s P/E to that of its industry and the overall market. Now, there’s a lot to learn about fundamental analysis. You need to understand how to look at a company’s financial statements and the inner workings of the industry.
Basically, if you’re strapped for time, fundamental analysis may not be for you. However, you can take little factors that might affect a stock or industry, such as a catalyst event. For example, if there are tariffs on steel and aluminum, it should affect the overall industry. It’s going to take time and experience for you to learn which catalysts should push a stock up or drive it down.
At Raging Bull, we’re constantly looking for positive catalysts before we buy a stock. Kyle Dennis likes to buy biotech stocks before a catalyst event, especially if the chart patterns look good to him.
Here’s a look at how he writes out his trading plan for biotech stocks.
Checkpoint Therapeutics (CKPT)
Catalyst Dates: Phase 1/2 late-breaking data due out September 24th
Buy Zone: $3.55 to $3.95
Profit Zone: $4.50 or higher
Stop Zone: $3.30 or below
Now, it’s not only Kyle Dennis who’s using catalysts. Jason Bond and Jeff Bishop do the same. However, they’re more focused on technicals and if there’s a positive catalyst, it should increase the probability of success for their trades.
Let’s get into technical analysis.
Start Trading: Technical Analysis
Technical analysis relies on prices, volume, and chart patterns. Technical traders focus on different technical analysis tools and aim to indicate where a stock could potentially move. Those who use technical analysis believe a stock’s future direction could be determined by chart patterns.
Similar to fundamental analysis, technical analysis takes time and dedication. You’ll need to look at charts and study the patterns and indicators. However, once you get it down pat, it’s not crazy to multiply your money.
Start Trading: Examples
For example, Jeff Bishop uses his “money pattern” to signal when he should buy puts or calls on a stock or exchange-traded fund (ETF).
Jeff uses a moving average crossover to let him know when a stock might be ready to catch a bid or drop. In addition to this, he uses catalysts and other potential changes in the fundamentals of an industry or the overall market.
He’s primarily using technical analysis, but will also look at fundamentals. Here’s a look at one of his many money-multiplier trades.
He saw the moving average crossover indicate a potential change in trend. Thereafter, he bought call options in Baidu Inc. (BIDU) and made over $20K.
Jason Bond also likes to use charts and catalyst events to increase his probability of success.
Here’s a look at one of Jason’s trades that he sent to the community.
BUDZ – Finally caught a bid Monday and wow did it move nicely. Range to the MA(200) is even better than CANN above so this is likely the stock I’ll go with. Thinking 7,000 shares above the MA(20) looking for $.50 / share or $3,500 profit.
Jason Bond is constantly nailing penny stock trades using technical analysis and a little bit of fundamental.
Now, before he put this trade on, there was a fundamental change in the cannabis industry. Constellation Brands (STZ) invested $4B in Canopy Growth (CGC), a cannabis company. Thereafter, pot stocks were hot. There’s a lot of people looking to start trading pot stocks due to this change. Moreover, Canada legalized marijuana, which should have pushed the industry higher too. By combining the fundamentals with technicals, Jason had a nice 10% profit.
That said, even if you choose one type of analysis over the other, it doesn’t mean you should completely ignore it.
Stock Technicals Vs Fundamentals: the Bottom Line
No matter what type of analysis you choose, you still need to take into account changes in the other. Just because you primarily use technical analysis, it doesn’t mean you should ignore fundamental changes. Similarly, if you’re using fundamentals and you think a stock is undervalued, but it keeps trending lower, you might want to look at the technicals.
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“Jeff, I have to say I was a little gun shy, but I bought the lifetime service (to Bullseye Trades) Friday night. First trade with your service…in LULU, 205 Calls at $4.70. (I) was going to be away from all internet connections for the next 3 days. It hit my sell price at $6.25 ;)” said James W. (Read More)