Technical analysis uses charts, price history, and trends to try to predict the best entry or exit levels. Technical analysts believe these patterns and technical indicators seen in the charts allows them to better predict what will happen with the price of the asset some time in the future.
Fundamental analysis, on the other hand, uses real world macro and micro-economic factors and considers the financial statements of companies. The idea of fundamental analysis is that if a company, the economy, etc. is performing well and expected to continue to perform well, the asset’s price will correspond. Fundamental analysis is particular helpful in finding value stocks, or stocks that are undervalued compared to the rest of the market.
Which Method is Best?
There are many intelligent analysts that are on either side of the argument of whether technical or fundamental analysis is better. Technical analysis may be the preferred method for day trading and short term trading. However, for those investing in the longer term, fundamental analysis may be the preferred method. This can be combined with technical analysis in an attempt to find the best entry or exit points when investing. Still, some say it is impossible to time the market making technical analysis worthless (I disagree!).