InvestorQ : Do I understand that fundamental analysis is about value and technical analysis is about the trend of the stock or the market overall?
Dia Deshpande made post

Do I understand that fundamental analysis is about value and technical analysis is about the trend of the stock or the market overall?

Answer
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Ria Jain answered.
1 year ago


That is broadly correct. The fundamental analyst acknowledges that every stock has a company behind it. Since the company has a certain value due to the cash flows it generates, the stock derives its value from the value of the company. He sells the shares when the market value of shares is more than the intrinsic value and earns profit. The technical analyst believes that there is no real value to any stock. In technicals, stock prices depend on demand and supply forces which in turn are governed by rational and irrational factors. But the market is all-knowing and hence reflects all that is good or bad about a stock. That is all that matters to a technical analyst.

A very important underlying assumption of technical analysis is that past trends can be used to used to project future trends since patterns tend to repeat themselves. Hence, technicals are about understanding the trend and playing in sync. Fundamental analysts do not worry about price trends and volume trends. They believe that if a stock has value, the price will eventually gravitate towards the value. They are also agnostic about the holding period, which technical analysts are not. Fundamental analysts believe that if a stock has value then it even makes sense to go contrary to the market trend and buy or sell the stock. For a technical analyst, trend is the friend and it is trends and patterns that matter in the final analysis. They believe that past trends will be repeated again and the current movements can be used for studying the future trend. Hence the focus should be to work the patterns and identify the trends. Once the trend is identified and extrapolated, you just need to wait for the trend to repeat.