Fundamental Vs Technical Analysis

Fundamental and technical analysis are two distinct investment methods used by investors to derive investment decisions. Both methods share the same objective, but the data and tools that they use to determine an investment decision are entirely opposed to each other. Technical analysis uses exclusively charts, while fundamental analysis relies on company reports and financial data. Let’s examine the two investment methods in more detail below; 

Fundamental analysis uses real data to derive a stock’s intrinsic value. This type of investment method analyzes financial data, which is “fundamental” to the future performance of the company and its share price. So an investor who relies on fundamental analysis would be largely basing their investment decisions on several factors. For example, any competitive advantage a company might have compared to its rivals, such as patented technology giving its product a unique selling point. Moreover, a company might be able to take advantage of economies of scale, thereby undercutting its rivals, yet still maintaining the highest profit margin in its sector. 

Another factor that fundamental analysts examine when determining a share’s intrinsic value, includes a company’s earnings growth. Is the business expanding in a profitable way by keeping its costs under control? Revenue growth is also an important factor when determining the viability of a business. If the business is under competitive strain it would show up in its revenue figures, since price is a factor of revenue, thus a fall in price due to competitive pressure would result in a fall in revenue, given no change to sales in a certain period. The company’s market share is also a crucial data for the fundamental analysis when determining the intrinsic value of the stock. The more dominant a company is in its market, the more likely it would be to drive rivals out and manipulate prices to maximize its revenue. 

A company’s financial reserve is another factor fundamental analyst like to peruse over when deriving their investment decisions. In a period of economic downturn turn, when credit is tight, the availability of financial reserves could mean the difference between the company’s survival and failure. 

Product pipe line, the likelihood of future products/services being launched on the market, is also considered by the fundamental analyst. For a company to remain a market leader, or aspire to dominate its market, product innovation and development are essential; this is particularly the case in the tech sector, pharmaceutical sector and frankly any business environment that could benefit from research and development. 

Fundamental analysts also like to eye up the company’s management team, bearing in mind that a company is made up of people and guided by its management. Management track record and their experience are often used to gauge the future performance of the company. 

For the fundamental analysts the Holy Grail lies in the company’s annual/interim reports and financial statements with the aim of finding value stock that the market has mispriced. So when the stock is underpriced they buy, alternatively when the stock is overpriced they do the reverse and sell.

The technical analyst, on the other hand, is a different type of animal. Indeed, a technical analyst doesn’t look at the financial statements of the companies they may wish to invest in, let alone know who runs them. The technical analyst bases their investment decisions on a distinct investigation method by studying historic charts, patterns and trends of publicly quoted companies. This type of analysis employs the use of charts, bar charts, candle stick charts, and trading volume to determine the future trajectory of share prices. Such things as a company’s revenue, market share, product pipeline and financial statements are literally of no concern to the technical analyst. It’s almost as if the technical analyst is entirely oblivious and unconcerned about the entity’s activities. The technical analysis is completely focused on the historic and potential future price movements of the instrument they wish to invest in. They believe that future price movement of a particular financial instrument can be determined by analyzing its price charts. Trend lines can be plotted to determine their trajectory and entry (buy) and exit (sell) points. Technical analysis, as a method of investigation assumes that we are creatures of habit that we behave in a certain predictable way when the price of an instrument breaks through a predetermined threshold point. So the technical analyst type of investor buys when an instrument’s price falls to its price support level, conversely they sell when the price breaches its price resistance level. 

They say if you want to master a game you need to watch meticulously the top players in action. So what do the gods of the investment world do? Apparently, there is no ambiguity when you ask Warren Buffett, Peter Lynch and Benjamin Graham, whether they base their investment decisions on fundamental or technical analysis. "I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer," famously replied Buffett when asked what he thought of technical analysis as an investment method. 

Meanwhile, Peter Lynch, another billionaire investor who was involved in Fidelity Investments, returning an average of 29 percent between the years 1977-1990, said "Charts are great for predicting the past." Benjamin Graham, famously said, "In the short term the market is a voting machine, but in the long run it is a weighing machine."

So those in the top league share a few things in common, they didn’t rely on trend lines, charts and candlestick charts to amass their fortunes; they relied on fundamental analysis and focused on finding long term value in their investment decisions.

Well and good, but over the past decade the scandals of Enron and more recently the Bank of America, Citi Group, GM and the list goes on of companies cooking the books calls into question the auditor’s report, “that the financial statement gives a true and fair view of the state of affairs of the company.” In a globally connected, highly competitive world, where success is handsomely rewarded and failure punished, the pressure for companies to perform is greater than ever, sometimes, not always, financial statements and reports may be economical with the truth. For this reason, an investor who ignores or dismisses technical analysis as tea leaf reading would do so at their own peril. The fundamental analyst may interpret value in a stock after interpreting its accounts, but they may also be oblivious to high volume trades in the stock due to say, insiders selling. Such a move would blip on the technical analyst’s radar and they would be able to take measures to preserve wealth.

You may not drive your car looking only in the rear mirror, but it certainly helps you avoid an accident by checking regularly what is going on behind you. Perhaps it is for this reason that all large broking houses now employ technical analyst.

The Your Way to Wealth Workshop

I was an attendee at Darren Winters' Investment workshop this weekend, where the man himself was presenting some of his key investment methods and philosophy.

The workshop was held in the main ballroom of the Radisson Blu hotel in Portman Square in London. This is a spacious venue, and the ballroom has six eye catching chandeliers that were subtly lit to provide an optimum view of the big screen on the raised platform at the rear. Once the over 200 attendees were comfortably seated, many of them sipping their complementary bottled water and contemplating their training manuals, pens and notepads, Darren took the stage to begin his presentation.

He had to confess that he would have preferrred Barbados as a venue, but thought we wouldn't get anything done. So he consoled us with the thought of a celebration in Barbados instead, once we'd achieved success with the methods he was about to teach us.

He began by talking about the origins of this course. It has been distilled using the most effective methods that he has learned in more than twenty years of studying investment techniques. He's attended numerous seminars and over thirty training courses, and has sought out the best traders in order to learn directly from them. People like Larry Williams and John Bollinger have taught him one to one. He apprenticed himself to a leading investor in order to maximize the learning experience. His apprenticeship was the most effective way to model and copy someone who had already achieved investment success, and that commitment is now reflected in Darren's own multi-million pound bank balance.

We then launch into what we will cover on day 1. This ranges from basic technical and fundamental analysis, understanding the big picture, how to choose quality companies, when to buy and sell, plus psychology, strategy and rules for success. This is pretty comprehensive, and the experience level of those present ranges from complete beginner to veteran investor.

Not wanting to presume anything, Darren begins with basic concepts around markets and techniques of analysis. This is presented simply and clearly, so avoiding the possibility of confusing anyone new to it with information overload. We then cover some basic economics, and where certain industries and sectors fit in to the economic cycle. We talk about the best fundamental criteria to use in choosing a quality company, which is followed by a neat method of identifying these companies that only requires a few minutes to set up.

To break things up and keep us focused we're invited to stand up and do a little stretching and breathing. This actually works, well certainly in my case anyway. It helped to keep me fresh and alert at hourly intervals throughout the weekend.

After which, the basics of charting and charting patterns is introduced. To assist our understanding Darren then offers us a free gift. He gives us all access to three candlestick training videos on his website that he uses in his own apprentice program. These explain how and why the patterns work, with some specific rules to maximize their reliability. As someone who has done some forex trading, I'm looking forward to viewing these videos.

This is an opportune moment for Darren to explain his apprentice program, which he believes is the most effective way to learn and practise his methods. It comes in three flavours - elite, fast track, and mentored, and the price is structured accordingly. The key content of the program consists of personal video analysis of your own trades, along with access to the same analysis of the 16 other apprentices in your intake. This is combined with tutorials, bonus beginners videos, recordings of Darren's own trading sessions, and a live trading day. It all seems pretty comprehensive, and he sweetens the deal by offering a substantial discount to those people willing to act as case studies for a book he's writing. The main aim of this training is to help you achieve consistency in your investing, and the apprentice program is certainly a persuasive argument to invest in the best way of learning from someone who has already done it. The first break sees a few people signing up (by the end of day 2 I recall hearing that 12 of the 17 available places had gone).

So by this point we've covered basics and the big picture. We then move on to what constitutes a good investment strategy, and focus on when to buy and when to sell. This assumes we have identified some good companies through our initial fundamental analysis, and we are now using technical analysis to determine exactly when to get in or out. The six steps he shows us can be applied to shares or any other investment instrument, and involves behaviour, trends and patterns among other things. There are specific instruction on what not to do as well. This topic take us through to lunch at around 1.45pm.

We return at 3pm. There have been lots of questions over the lunch break, so Darren takes some time to answer these, which leads to some interesting diversions about his personal experiences in the investment world. We concentrate a bit more on chart patterns, and he explains that he is showing us the best of these, selected after years of testing the multitude of patterns out there.

We come to the close of day 1 after a discussion of the psychological aspects of investment. These include the principles of good goal setting and the basis of beliefs about wealth, and how to effectively integrate these. Creativity is mentioned as a desirable attribute, and to this end throughout the day Darren has been giving us a few questions to ponder, just to shift our thinking. I'm still wondering how far a dog can run into the woods, I missed the answer to that one.

Day 1 ends at about 5.30pm. It's been stimulating to say the least.


We start day 2 where we left off, with a further talk on psychology and the importance of creating useful wealth beliefs. Believing it's possible to achieve your goals is a crucial step in manifesting them.

We then concentrate a little more on significant chart patterns and how they actually work. Then it's time to discuss indicators, which for those of you who don't know are tools to assist in decision making when you're entering a trade. As for chart patterns, there are many indicators in use, but only a few that are actually useful when applying a trading strategy. They are used to confirm certain patterns and price movements. We talk about these at some length, and once we're done we now have a full explanation of the six crucial steps of trading selection covered.

To back all of this up, Darren shows us some analysis of trades done by his apprentices, and where everything we've been taught fits in. This is followed by a number of specific strategies that can also be incorporated into the decision making process.

The day has flown by at this point, and we wind up with an Action Plan to get us started on the actual business of trading. Darren doesn't mislead us by saying applying all of his training will be easy, but assures us that if we're willing to put in some work our prospects of success are very good indeed. We now know more than 90% of the professionals doing this already.

It's been an interesting weekend. For me, the trade selection steps and the proper use of indicators alone has made it worth attending. All backed up with clear documentation for future reference. I leave with the intention of putting it all into practice as soon as possible. As a training course, highly recommended.