Investing in the stock market is both an art and a science. Whether you are a long-term investor or a short-term trader, understanding Technical Analysis and Fundamental Analysis is important for making better investment decisions
Technical Analysis focuses on price movements, trends and trading volumes, while Fundamental Analysis looks at a company’s financial health, business model and economic factors.
Both methods have their own advantages, and combining them can help investors reduce risk and maximize returns.. Let’s dive into the details.
Understanding Technical Analysis
Technical analysis is the study of stock price movements, patterns, and trading volumes to predict future price action. It is widely used by traders for short-term and intraday trading.
Example: If you see a stock forming a "Head and Shoulders" pattern, it may indicate a trend reversal, helping you decide when to buy or sell
Moving Averages (MA) : Helps identify trend direction (Example: 50 day and 200 day moving averages).
Relative Strength Index (RSI): Indicates overbought (>70) or oversold (<30) conditions.
Bollinger Bands: Measures market volatility and helps identify breakout points.
Quick Decision Making : Helps traders make fast buy/sell decisions based on price movements.
Identifies Entry & Exit Points: Useful for timing market entries and exits.
Works Across Asset: Can be applied to stocks and commodities.
Understanding Fundamental Analysis
Fundamental analysis examines a company’s financial health, growth potential and economic factors to determine its true value. It is widely used for long-term investing.
Example: If you analyse a company’s earnings, debt levels and industry growth, you can estimate whether its stock is undervalued or overvalued.
Price to Earnings Ratio (P/E ): Compares stock price with earnings per share (EPS).
Earnings Per Share (EPS): Measures a company’s profitability per share.
Debt to Equity Ratio: Shows a company’s financial leverage.
Helps Identify Quality Stocks: Focuses on companies with strong financials and growth potential.
Reduces Market Noise: Not affected by short-term market fluctuations.
Supports Long-Term Investing: Ideal for wealth creation through compounding.