When you are interested in investing or index trading, one of many questions you must answer is whether you are interested in fundamental or technical analysis as your trading strategy. These are the two primary investing methodologies, and each system has its own characteristic advantages and disadvantages. The strategy you choose will depend largely on your goals and the current financial markets.

In general, technical analysis is a trading strategy that looks at the past price movements of a particular security in order to predict future price movements. Fundamental analysis, however, focuses on economic factors directly affecting the company when deciding what to buy or sell.

A Closer Look at Fundamental Analysis

Fundamental analysis looks closely at a business, analyzing its cash flow statement, income statement, and other financial records to determine the intrinsic value for that particular company. When the stock price is below this supposed intrinsic value, the asset is considered a good buy. A stock is considered a poor investment if the purchase price is greater than its intrinsic value. Of course, there are many other economic factors considered by the fundamental analysis trading strategy, but this gives a basic idea of how the analysis works.

Fundamental analysis requires that investors take a long term approach to looking at a company or an asset. Most fundamental analysts want many years’ worth of information from the companies they are considering investing with in order to make a decision. Also, the investments are considered long-term investments, as it takes a while for the company’s actual value in the market to reach its intrinsic value as stated by the analyst. In a down economy, this can translate into lost income, because the investor must buy and hold the asset for many years without seeing any increase in value. The investor is assuming that the increase will come later and that the stock will eventually have the same value as the company’s intrinsic value.

Fundamental analysis has a longer history of use by investors. People have been investing this way for many years. Conventional financial wisdom holds it to be the safest method of investment. However, in order to succeed in long-term investing using fundamental analysis, you must have a thorough understanding of economics, the resources necessary to find the economic statistics about a particular company, and a sound company in which to invest. In some cases, investors have lost money when companies that seemed to have solid financials suddenly filed for bankruptcy protection. In the long term, some losses like this may not affect an overall investment plan, but for many seeing them is discouraging in the short term. This has led to a growth in the popularity of technical analysis and index trading.

A Closer Look at Technical Analysis

Those who are interested in swing trading often take the technical analysis approach. This involves analyzing the stock alone and not focusing on the economic factors affecting the company. The technical analyst feels that it does not matter how much intrinsic value a particular company has if that value is not reflected in the stock market, because the value may never be felt by the investor. Everything someone who is index trading using a technical approach needs to know is found in the stock charts.

This means technical analysis tends to be a trading methodology with a shorter time frame. The goal is not to buy an investment and hold on to it for a long time, but rather to buy an asset when it has a low price and sell it as soon as it has gained enough to make the trade worthwhile. These investors are constantly making trades back and forth, which is why this type of trading is often called swing trading. The charts they use are also short-term in scope. They may cover a few days or a few hours, depending on the type of trading being done, but they rarely cover several years. The goal of the index trading investor is to see what the stock is likely to do in the short term, in order to decide whether or not there will be some increase in the near future.

Of the two types of investing, technical analysis tends to have the greatest amount of success in the short term.  Traders using technical analysis need a reliable trading strategy in order to cement their gains over the long term.

Technical analysis and trading often perform very well when the the market as a whole is performing poorly.  When markets as a whole hold steady or drop, there will always be days when a particular stock will do very well, and others when it will do very poorly.  Index trading allows the investor to analyze past trends and predict when these spikes and drops will occur.  This means that the investor can sell when the price jumps up and buy when the price goes down, creating a return even in a time when buy and hold investors are not seeing any. With a good trading system, returns are possible with almost any up or down movement in an asset price.  With buy and hold investing and fundamental analysis the investor is waiting on a company to perform well in order to see a return.  If that company’s product or service stops selling well, the investor will lose significant amounts of money.

Which is Right For You~Which Trading System is Best for You}~{Which Method is For You}~Which Trading System is Best for You}?

It is up to you to look at your financial needs and goals and decide which method of trading you are going to use. Are you looking for a long-term investment option, or do you want a short-term option to get you through the current economic downturn without significant losses? Do you need to see an increase in your investment soon for an upcoming expense, or do you have the luxury of time to wait for future increases? Perhaps a balanced approach, with both types of investments in the same portfolio, will better serve both your long-term and short-term financial goals. Regardless, understanding both schools of thought and how they play out in an economic downturn is crucial to your investing success.

Tags: Fundamental Analysis, index trading, technical analysis, trading strategy