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Technical vs Fundamental Analysis: Two Questions About One Stock

Fundamental analysis asks what a business is worth; technical analysis studies price and volume. How each works, what each assumes, and where each falls short.

By Published 4 min read

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Key takeaways

  • Fundamental analysis studies the economy, the industry and the company to estimate what a business is worth.
  • Technical analysis studies price and volume history to describe trends and momentum.
  • Fundamental analysts compare a company with its peers; technical analysts compare a price with its own past.
  • Both have known weaknesses: fair-value estimates depend on uncertain forecasts, and chart signals can arrive late or fail.
  • Neither method removes uncertainty, and neither turns a stock into a sure thing.

Ask two analysts about the same stock and you may get answers that do not even address the same question. One talks about revenue growth, debt and competitors; the other about trend lines, moving averages and momentum. They are using the two main schools of stock analysis, which start from different assumptions and look at different evidence. StockCharts' ChartSchool describes each one, including where it falls short.

Fundamental analysis: what is the business worth?

ChartSchool defines fundamental analysis as examining the underlying forces that affect the well-being of the economy, industry groups and companies. It often works top-down:

  1. The economy. Growth, interest rates and inflation affect almost every company. ChartSchool's image: the economy is the tide and companies are boats.
  2. The industry. Supply and demand for an industry's products, and how it is changing.
  3. The company. Financial statements, management, the business concept and competition.

The raw material is the company's own reporting: the 10-K and 10-Q filings described in how to read an earnings report. FINRA's guide to evaluating stocks lists ratios commonly derived from them, including earnings per share, the price-to-earnings ratio, price-to-sales and debt-to-equity, and advises comparing them within an industry, because averages vary widely between industries.

The goal, in ChartSchool's description, is to estimate a stock's fair value; if fair value differs from the price, fundamental analysts consider the stock over- or undervalued and expect the price to move toward fair value over time. ChartSchool also notes that comparisons are relative: a telecom company is compared with other telecom companies.

Technical analysis: what is the price doing?

Technical analysis studies the market's own record. ChartSchool describes its raw material as price data, any combination of the open, high, low, close and volume over a given timeframe, and notes it can be applied to anything traded where price is set by supply and demand.

Its toolkit includes candlestick charts, trend lines, support and resistance and indicators such as moving averages and the RSI. A central belief, in ChartSchool's words, is that prices trend, although most technicians also acknowledge periods when they don't.

Side by side

Fundamental analysis Technical analysis
Main question What is the business worth? What are price and volume doing?
Evidence Financial statements, industry, economy Price and volume history
Typical tools Ratios, cash flow, competitive position Charts, trend lines, indicators
Comparison Company against peers and its own history Price against its own past
Main weakness Forecasts of future earnings can be wrong Signals can lag or fail

The limits of each

Fundamental analysis depends on forecasts. A fair-value estimate is only as good as the assumptions about future earnings, and the market can disagree with an analyst for a long time. Accounting choices also shape the numbers; the 10-K's management discussion explains the key judgments.

Technical analysis has its own problems, which ChartSchool lists frankly. It has been criticised for being too late: by the time a trend is identified, a substantial portion of the move may have already taken place. And not all technical signals and patterns work; what works for one stock may not work for another. Indicators, being calculations from past prices, describe rather than predict.

One company, two readings

Imagine a company whose latest annual report shows revenue up 15%, steady margins and falling debt, while its share price has drifted down for six months.

  • A fundamental reading might conclude that the business is improving and ask whether the price now undervalues it, checking the P/E ratio against competitors and reading the risk factors for anything the market might be worried about.
  • A technical reading might note that the price is below its falling moving averages and has broken a previous support level, and describe the trend as down.

Both readings can be accurate at once. They answer different questions, and the disagreement between them is information in itself: it may mean the market expects something the reported numbers do not yet show, or simply that it has not caught up. Neither reading tells you which.

Using both

ChartSchool argues that even committed fundamental analysts can learn from a price chart, because it is an easy-to-read history of how the market has treated a stock. Some investors use fundamentals to understand what they own and charts to see how the shares have traded. Combining the two adds perspectives, but it does not add certainty, and neither approach turns a stock into a sure thing.

Learn to Trade Stocks Beginner starts with what owning a share means and includes chart-reading lessons, replayed charts and a virtual balance, and its listing frames indicators as summaries of price or volume information that cannot confirm a future outcome. It is one of our education apps; the investing basics hub lists the guides for each method.

Good to know

Frequently asked questions

What is the difference between technical and fundamental analysis?
Fundamental analysis asks what a company is worth, using its financial statements, industry and the economy. Technical analysis asks what the price and volume history suggest about trend and momentum. One looks at the business; the other looks at how its shares have traded.
What does fundamental analysis look at?
ChartSchool describes a top-down approach: the overall economy, then industry groups, then individual companies, using financial data, management, the business model and competition. Investors commonly use ratios such as P/E, price-to-sales and debt-to-equity, compared within an industry.
What are the main criticisms of technical analysis?
ChartSchool lists two: signals can come too late, after much of a move has happened, and not all signals and patterns work, with what works for one stock not necessarily working for another. Indicators also summarise only past prices.
Can you use both?
Some investors do, for example using fundamentals to understand a business and charts to see how the market has been treating it. Combining them adds perspectives; it does not remove the uncertainty in either.

Sources

  1. Fundamental Analysis (ChartSchool) (opens in a new tab)StockCharts.com — accessed
  2. Technical Analysis (ChartSchool) (opens in a new tab)StockCharts.com — accessed
  3. Evaluating Stocks (opens in a new tab)FINRA — accessed

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