Can I trust technical analysis

Differences between chart analysis and fundamental analysis

A share analysis basically pursues the goal of assessing a share value and enabling forecasts about future price developments.

Chart analysis and fundamental analysis have very different approaches to achieve this goal.

It is controversial which form of analysis leads to greater success. Many experts recommend a combination of both procedures.

In order to be able to decide for themselves which analysis method is to be trusted more, it is important for investors to know the differences between chart analysis and fundamental analysis.

How do chart analysis and fundamental analysis work?

In the chart analysis, it is generally assumed that all price-relevant information is already reflected in the price trend.

For this reason, business and economic indicators are not used to assess the share and to make a forecast.

Rather, it is expected that price developments will follow certain patterns that will repeat themselves in a similar way with the same sign.

In this way, trends and developments from the past are analyzed in order to be able to deduce how a value will behave in the future.

More on this: Significance of chart analyzes - how big is it?

Fundamental analysis, on the other hand, takes a completely different approach. With their help, an attempt is made to determine the value of a company or a share based on fundamental data.

The business and economic data of a company are considered in order to be able to make a buy or sell recommendation.

Many important company figures are put in relation to the current share price. The most important key figures include, for example, the expected earnings per share, the book value of the company, the cash flow or the return on investment.

More on this: Benjamin Graham: The Securities Analysis

Differences between chart analysis and fundamental analysis: strengths and weaknesses of the two methods

One of the great strengths of chart analysis is that trends and developments are theoretically recognized at an early stage so that the user of the process receives early signals to buy or sell.

The human factor is also a potential advantage. If many investors use the chart analysis and receive the same signals, this increases the chance of the forecast being fulfilled.

In the sense of the self-fulfilling prophecy, this means specifically: If many investors receive a sell recommendation and implement it, the price can actually fall due to the numerous sales.

But humans can also mean a weakness in the system. Investor behavior can never really be predicted, so the chart technique is also prone to errors.

Since fundamental analysis, in contrast to chart analysis, focuses on company data, investor behavior plays a lesser role here.

If the result of a fundamental analysis speaks in favor of buying a share, the company figures clearly indicate that the share has plenty of room for improvement.

However, it remains uncertain whether investor behavior will follow this forecast and whether there will actually be a profit.

A lesser-noticed disadvantage of fundamental analysis is often an investor's emotional attachment to a stock that has been bought as a result of this process.

After a lot of work has been put into the analysis, investors are often so convinced of their investment that they will not make the jump in the event of a long-term price loss.

Which analysis method is recommended?

Even if you know the differences between chart analysis and fundamental analysis, it ultimately remains a personal decision which method you tend to use.

Both analysis methods provide important and interesting information that can facilitate successful trading in stocks. But both methods also have their weaknesses and can never make a completely reliable prediction.

It is therefore advisable for private investors to use both sources, combine the information and, moreover, never disregard common sense.

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