In stock analysis, there are basically 2 forms of research — technical analysis and fundamental analysis. The common question is, which one is more accurate?

There is no argument that fundamental analysis is surely more accurate than technical analysis! Imagine buying into a company with great management and great products, especially ones that will become a hit in the near future. If you have the expertise and vision to spot such companies, you will make tons of money. That is what a true stock investor do, uncovering potential companies and buy them before the stock price explodes. But how many people have the time and knowledge to do that?

Another idea of fundamental analysis is buying stocks with stable business and good dividend, and hold the stock for long term. Imagine buying a stock which gives a dividend of 4% a year. This means if you hold the stock for 25 years, you would have recouped the stock cost from dividend alone. Whatever remaining in the stock price after 25 years is your profit. This is what those old-timer savvy investors do.

Technical analysis however is a different thing. Instead of looking at the company’s report and market prospects, it looks at the stock chart and tries to make sense out of it. Technical analysts believe in 3 principals:

1) Everything about the stock and its market is already reflected in the stock price, be it the fundamental, economic or even political.

2) Trend is your friend. Stock prices move in trends and that trends will persist. If the stock price of a stock is well traded and the stock price is increasing, it implies that everything about that stock is good, the fundamentals and the industry outlook, etc. On the contrary, if the price of a stock is trading lower and lower, it will be foolish to think that you are bottom fishing!

3) The short to mid-term movement of the stock prices are governed by market emotion and market emotion is repetitive! As the old saying goes, history repeats itself. Market emotion is reflected in the market buy/sell activities, and these activities can be computed and represented in charts and patterns. This is where technical analysis becomes powerful.

Another thing about technical analysis is that lots of people are using it nowadays. Institutional traders use it. Even programmers have developed robots to trade the market using technical analysis. So when technical indicators are showing a buy signals, you can imagine many people are going to buy it and needless to say, the stock price goes up.

Having said that, we can’t deny the importance of fundamental analysis, especially for long-term investor because that is what move the stock price in long run. But if you are a short to mid-term trader, you will realize that technical analysis will provide you with better clarify of when to buy/sell a stock.

The best practice is of course to combine both fundamental and technical analysis. Only buy stocks with good fundamentals, ones that consistently make money over the years. Then use technical analysis to decide when is the right time to buy these stocks. This way, even if you make the wrong decision, you are not likely to lose your shirt.