Fundamental Analysis Verses Technical Trading: Do Fundamentals Predict Stock Prices?

Most traders and investors use fundamental analysis to discover stocks and make choices on how to invest. Fundamental analysis is termed as the study of external factors related to individual companies or industries. These factors can provide clues as to the supply and demand for a specific security. Technical trading is often seen as price action that considers all known facts and it is price that represents everything known about a particular market.

Can either exist on its own? Many traders say yes. They trade price in the current environment as they compare it to prices in a previous environment. All technical trading is done based on previous price action. Highs, lows, moving averages, trend lines and price patterns make up the technical trader's arsenal for decision making. A host of hundreds of indicators and oscillators is also available to the technician. None of those changes in price could occur without investors using fundamentals to make decisions in the first place. Imagine everyone making a trading decision to buy or sell without the availability of consulting fundamentals. That would be like investing without the use of an annual report, company news, the weather or government statistics. There would be little basis to make a reasonable decision.

The battle rages on as to which type of trading is more feasible, concrete and profitable. I say that you have to have the majority of traders and investors making decisions based on fundamentals alone. That takes into account all the numbers and comparisons to previous statistics and expectations. This would support the argument that fundamental based investing provides the foundation for technical trading. I am a technical trader that uses charts to trade from. I often do not know what a company does, if it is profitable or what analyst's expectations are for the future. Although I can read an annual report fairly well, I hardly ever use that information to make a trading decision.