Investing Focus

Technical vs. Fundamental Analysis
By Thomas Stone of statisticaltrading.com

The debate rages on. Which is better, technical analysis or fundamental analysis?

The question seems simple but it is deceptive. Underneath the question is an unspoken assumption about time horizons. Is the questioner an investor or a trader?

An investor is becoming part of something. The investor makes his choices based on a belief in the future. He desires to help make something successful. If he believes that apples will be in great demand next year he may invest in an orchard to grow apples for sale next year. During the year, while his apples are growing, he may ignore the day-to-day price changes of apples because his focus is on next year.

The trader doesn't care to be part of anything other than the enterprise of making money. If he thinks orchards will increase in price next week, he'll buy an orchard. He doesn't care about orchards or apples. He'd buy a worm farm today if he thought he could turn a dime on it next week. He is very concerned about day-to-day price fluctuations since it is the past behavior of prices that make him expect the price to go up next week.

If the belief in the future value of apples is shaken then some of the orchard investors may decide that running an orchard isn't the best choice. They abandon the business. Other investors see the cost of orchards dropping and, at some price point, believe that the now lower cost of orchards justifies the apple business given the reduced future price of apples. They start buying orchards.

This doesn't happen all at once. Not everyone agrees with the amount that the price of apples will drop by. Because of this, different people see different price points as being good times to get back into the apple business.