I still like the old joke that goes, “How can I end up with a million dollars through trading stocks?” – “Start with two million and trade using technical analysis.

”Let me put a disclaimer on that by saying that I am, in fact, primarily a technical trader myself and very much an advocate of technical trading. But it’s still a good joke.

Fundamental analysis and technical analysis are the two broad, general approaches to market analysis and trading. Each approach has its advocates and its detractors, and there are hugely successful – and unsuccessful – traders in both camps.

Fundamental analysis aims at identifying the real, intrinsic value of a security, based on the belief that the genuine value of something is what will ultimately determine its price. Fundamental market analysts attempt to identify a stock or other security’s intrinsic value by looking at factors such as overall economic conditions, industry trends, company management, profit and loss data, and any of a number of financial metrics that are used to determine the financial health and future prospects for a company. Some of the most commonly used financial metrics are the price-to-earnings ratio (P/E), price-to-book ratio (P/B), debt-to-equity ratio(D/E), return on investment (ROI), and return on assets (ROA).

Fundamental stock traders rely heavily on data such as a company’s quarterly and annual earnings reports, to see the earnings-per-share which indicates a company’s profitability as divided among the total amount of publicly-traded equity in the company. Additional data for analysis by fundamental traders is gleaned from the published financial statements of publicly traded companies, such as a company’s income statement and balance sheet.

The exact nature of fundamental analysis varies according to investments. For example, fundamental traders of the foreign exchange – forex – market eye data such as gross domestic product (GDP), manufacturing, import and export data, and the consumer price index (CPI) in order to assess the overall health of a nation’s economy. Logically, nations with stronger economies will also likely have relatively stronger currencies.

Advocates of fundamental analysis point out that it is based on solid financial data, and therefore likely to be reliable. However, a drawback of fundamental analysis is that it requires timeconsuming research, and doing things like financial modeling and company valuations is not an endeavor well-suited to many investors.

(Get it? – the FUNDAMENTALS of TECHNICAL analysis? See what I did there? ☺ )

Technical analysts ignore all of the factors considered by fundamental analysts, and instead concentrate their evaluation of a security solely on analyzing market price action in order to identify current and likely future price trends. The basic belief of technical traders is that all relevant factors of supply and demand are reflected in the price movement of a security. Technical traders argue, for example, that there’s no need to engage in the practice of fundamental traders attempting to assess whether current economic or marketplace conditions favor increasing demand for a company’s products – Instead, technical traders would say that if the company’s stock price is rising steadily, then that shows that their products are in increasing demand.

The basic tool of technical analysts is the price chart. Technical analysts look at all manner of data that can be plotted on a price chart for a security, such as trend lines, trading volume, moving averages, and support and resistance levels. Technical analysts don’t bother attempting to identify intrinsic value of s security, instead using chart analysis to identify price action patterns that indicate probable future price direction and movement.

Both the strength and the weakness of technical analysis lie in the fact that there is virtually an endless list of technical indicators to choose from in analyzing a security. That’s strength because you have a wealth of price analysis tools at your disposal to help you determine probable future price movements. It’s a weakness because of the fact that you can get an endless number of conflicting indications and trading signals from different technical indicators. Among the endless choices of indicators to look at –such as moving averages, candlestick patterns, momentum indicators, and pivot points - how do you know what to pay attention to? And the simple answer is: you don’t. Technical traders select the indicators they use based on any number of reasons, and then hope that those indicators are the ones giving the most reliable trading signals.

Use the analytical approach that you’re most comfortable using, that you have the most confidence in.

Okay, you want something more than that? All right, but in the end your chosen method of market analysis really is going to come down to your personal preference and what is best suited to your personal trading style, financial goals, and risk tolerance.

The practical fact is that while 50 or 100 years ago fundamental analysis held sway, the arrival of computers has made technical analysis both easier and more widely used. These days, most of the largest market players – such as investment banks – base nearly all of their trading decisions on complex computer algorithms. It’s estimated that as much as 70-80% of all the trading volume on exchanges is generated through technical analysis. That doesn’t mean that fundamental analysis is a useless dinosaur as a trading approach, but it does mean that even fundamental market analysts have to pay attention to technical factors that may be driving market prices.

Many traders use some combination of fundamental and technical analysis. For example, a stock trader might select companies to invest in based on fundamental analysis of market sectors and various companies, but select specific price entry and exit points based on technical analysis.