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Technical Analysis vs. Fundamental Analysis

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity. If you have ever bought a stock, bond, or mutual fund only to watch it go down and then vowed to sell it once you "broke even," you might benefit from learning more about how technical analysts evaluate the markets.

A technician looks to take the emotion out of investing by applying rules that usually apply to almost every investment that fluctuates in price in a free market.

Technical Analysis vs. Fundamental Analysis

A fundamental analyst looks at the assets, profits, and the business trends of a company and derives an estimate of fair value for the stock. If the stock price is lower than this expected value, the stock should be bought. If the stock is trading higher than what the fundamental analyst believes it to be worth, the stock should either not be bought or sold. The problem with focusing only on valuations is that overvalued stocks can get more over-valued and undervalued stocks can stay undervalued.

Very often, technical analysts will skip analyzing the company's prospects and values and assume that the market is doing that for them because the stock price reflects everything already publicly known and expected about the company and its prospects. Technical analysis, instead, seeks to forecast future prices of investments and markets by analyzing past trading action.

In general, a technician believes that people have predictable mental short cuts of reacting to action in the markets (known as heuristics in cognitive psychology). Technicians seek to profit by anticipating the mass psychological biases of buyers and sellers in a broad range of markets.


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