Comparison between fundamental analysis and technical analysis

In the investing circle, people are always mentioning about fundamental analysis and technical analysis so what do they actually mean. In the broadest term, fundamental analysis involves looking at any datas except trading patterns of the stock itself while technical analysis focuses mainly on the trading and price history of the stock.

Investors using fundamental analysis usually believe that by purchasing the company’s stock, they will own a proportional share in the business. As a consequence, it is important to assess the company’s financial in terms of per share in order to calculate the how much the proportional share of the business is actually worth. Investors taking this approach usually like to find deals where they only need to pay half a dollar for a company worth 1 dollar.

Investors using technical analysis take a completely different approach. They do not care about the value of a company and what they are mainly interested are the price movements in the market. They believe that all information about a stock are already accounted for in the stock price so there is no incentive in analyzing a company’s fundamental.

Both these 2 methods have their pro and cons. By using fundamental analysis, you can have an idea of the company’s financial health, profitability and growth and at least you can be assured that the company that you are invested in has good potential and stable but one of the complications is that the underlying principles of fundamental are based on a huge numbers of factors and they get getting increasingly volatile and harder to predict over time. By using technical analysis, you can gain an insight of the overall state of the market, attractiveness and state of a specific security as compared to other securities.

I am currently exploring the possibility of creating a system which combines both fundamental analysis (heavier weightage) and technical analysis because I do believe that one can only find bargains from fundamental analysis whereas charts can give you an insight of the market mood. A rough idea of the new system which I have in mind:
1.) Derive the current price trend from charts
2.) If it’s a downtrend, search for factors which possibly causes this
3.) Do a complete fundamental analysis on the company and judge whether if the factors will affect the company for long or short term

Appendix
1. Investopedia
2. Motley Fool