Technical vs Fundamental Analysis: What Each Studies and What Research Shows

Fundamental analysis studies a business and its economy to estimate what an asset is worth; technical analysis studies the asset's price and volume history.

The two are the main traditions in analysing markets, and they start from different questions. One asks what a company earns, owns and owes, and what that implies about a fair price. The other asks what the price itself has done, on the view that the chart already carries what the market knows. This page covers what each approach looks at, the assumptions behind each, the same hypothetical company read both ways, what academic research has found, where each runs into limits, and where Kresmion shows the inputs to each. It makes no claim that either approach works better. It is descriptive throughout.

What fundamental analysis looks at

StockCharts' ChartSchool describes fundamental analysis as examining the underlying forces that affect the well-being of the economy, industry groups and companies. At the company level that means financial data, management, the business concept and competition; at the industry level, supply and demand for the products; for the economy as a whole, economic data.

The financial data come mostly from the statements a public company files with the SEC in its 10-K and 10-Q reports: the income statement, the balance sheet and the cash flow statement. From them an analyst builds measures such as earnings per share and the P/E ratio, and from those an estimate of value. In ChartSchool's description, the analyst's belief is that if fair value differs from the current price, the market price will in time move towards fair value.

What technical analysis looks at

ChartSchool describes technical analysis as forecasting future price movements based on past price movements, and compares it to weather forecasting: it does not produce absolute predictions. Its raw material is what ChartSchool, following John Murphy, calls market action: the open, high, low, close, volume and, for futures, open interest over a chosen timeframe.

The tools are drawn from that data. Candlestick charts show each period's range; moving averages smooth the path; RSI and MACD measure momentum; Bollinger Bands measure dispersion around an average; and support and resistance mark the prices where earlier moves turned. ChartSchool traces the discipline's foundations to the writings of Charles Dow, whose ideas were pieced together over several years into what became Dow Theory, later refined by S.A. Nelson and William Hamilton.

The assumptions behind each

The two traditions rest on different beliefs about prices, and ChartSchool states both.

• Technical analysis assumes, in ChartSchool's words, that the current price fully reflects all information, so the price is the basis for analysis, and that prices trend, at least at times. A technician concentrates on what the price did, not why.
• Fundamental analysis assumes that prices do not always reflect all available information, so a price can sit away from value for a while, and that analysis of the business can estimate that value.

ChartSchool quotes Tony Plummer's version of Oscar Wilde to sum up the split: a technical analyst knows the price of everything, but the value of nothing. The joke cuts both ways, since a fundamental estimate of value says nothing about when, or whether, the price will reach it.

One company read both ways

Take a hypothetical company whose shares trade at $50.00, with 100 million shares outstanding, so a market value of $5 billion.

The fundamental reading. The latest annual income statement shows net income of $250 million, so earnings per share are $250 million / 100 million = $2.50, and the P/E ratio is $50.00 / $2.50 = 20. The balance sheet shows the debt the company carries and the cash flow statement shows how much of that profit arrived as cash. An analyst then compares those figures with the company's own history and with its peers, and arrives at an estimate of value that may be above, near or below $50.

The technical reading. The chart shows the price has spent five months between $40 and $48 and closed at $50.00 last week, above that range for the first time. The 50-day average stands at $45.20. The volume on the week the price left the range was twice the average of the preceding weeks. A technician describes that as a move out of a trading range on heavy volume.

The two readings use different inputs and produce different kinds of statements: one about earnings, assets and value, the other about the path of the price. They can agree or disagree, and neither, on this page, says what the shares do next. Every number in this example is invented.

What the research has found

Whether either approach earns returns after costs has been studied for decades without a settled answer.

For technical analysis, Cheol-Ho Park and Scott Irwin reviewed the evidence in a 2004 report for the University of Illinois. They note that conventional efficient market theories rule out technical trading profits, while some newer models allow for them. Of the 92 modern empirical studies they surveyed, 58 found positive results for technical trading strategies, 24 found negative results and 10 were mixed. They add that most of the studies are subject to problems in their testing, including data snooping, choosing trading rules after the fact, and difficulty estimating risk and transaction costs, and they call for better tests before the evidence can be called conclusive. Their survey section reports that about 30 to 40 percent of practitioners in futures and foreign exchange markets appeared to believe technical analysis is an important factor in price movement at horizons up to six months.

Andrew Lo, Harry Mamaysky and Jiang Wang, testing chart patterns on US stocks from 1962 to 1996, found that several technical indicators provide incremental information and may have some practical value, while noting that technical analysis has not received the academic scrutiny and acceptance of fundamental analysis and that its patterns are often in the eyes of the beholder.

Fundamental analysis is debated as well, and this page takes no side in either debate. Past results, in any of these studies, need not repeat.

Where each runs into limits

Fundamental analysis depends on reported figures that arrive with a lag: a 10-K covers a year that has already ended, and a 10-Q a quarter. The figures follow accounting rules that allow judgement, and labels such as adjusted earnings differ from company to company. An estimate of value rests on assumptions about the future, and two careful analysts can reach different values from the same statements.

Technical analysis depends on choices of timeframe, indicator and setting, and the same chart can be read in more than one way. ChartSchool itself names cases where it may not apply well: thinly traded securities, price changes from splits and dividends that are not adjusted for, and extreme events such as a change in management, regulation or geopolitics, which it says technical analysis cannot predict.

Both share one limit: they describe information, and neither removes the uncertainty of what happens next.

Where Kresmion shows each

Kresmion is a data terminal, not a broker or an adviser, and shows the inputs to both approaches without combining them into a recommendation.

For the technical side, Kresmion's charting workspace draws candlestick and other chart types for stocks, indices, crypto pairs and other markets, with an Indicators menu that includes moving averages, RSI, MACD, Bollinger Bands and VWAP, and drawing tools for levels and ranges.

For the fundamental side, a company's page in Kresmion's app has a Financials tab that shows the income statement, balance sheet and cash flow by fiscal year or by quarter, built from the XBRL data in the company's SEC filings, with a toggle between a Standard view comparable across companies and an As reported view in the filer's own lines.

Both open with an account, which is free during the beta. Without one, each company's public research page lists its recent SEC filings and the largest 13F positions reported by the institutional managers Kresmion tracks.

Honest limitations

This page compares two broad traditions in a few hundred words each, and each contains many schools that disagree with one another. The descriptions of their assumptions follow one reference, StockCharts' ChartSchool, and other practitioners would phrase them differently. The research cited is a review of technical studies to 2004 and one pattern study to 1996; markets, costs and the studies themselves have changed since. The worked example is invented and chosen to be simple.

Key takeaways

Frequently asked questions

Which is better, technical or fundamental analysis?

There is no settled answer. Park and Irwin's review found positive, negative and mixed results across studies of technical trading, with testing problems in most of them, and fundamental analysis is debated too. They answer different questions, value on one side and price behaviour on the other, so they are not direct substitutes.

Can technical and fundamental analysis be used together?

Yes, nothing prevents a reader from looking at both a company's statements and its chart. They draw on different data, so they can agree or disagree, and combining them does not remove the uncertainty either one carries.

Does technical analysis work for long-term investing?

The research does not give a single answer for any horizon. ChartSchool presents technical analysis as applicable on intraday, daily, weekly and monthly charts, and the survey evidence Park and Irwin report concerns the views of futures and foreign exchange practitioners at horizons up to six months. Whether any method suits a given horizon is not something this page assesses.

What data does fundamental analysis use?

Mainly a company's financial statements, the income statement, balance sheet and cash flow statement, found in its 10-K and 10-Q filings, along with industry and economic data. Ratios such as earnings per share and the P/E ratio are built from those figures.

Where can I see both in Kresmion?

Kresmion's charting workspace carries the technical indicators, and the Financials tab on a company's page carries the statements. Both open with an account, free during the beta. Kresmion presents the data; it does not issue buy or sell views.

This page is information, not investment advice.

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Source: StockCharts ChartSchool, Technical Analysis, https://chartschool.stockcharts.com/table-of-contents/overview/technical-analysis ; StockCharts ChartSchool, Fundamental Analysis, https://chartschool.stockcharts.com/table-of-contents/overview/fundamental-analysis ; StockCharts ChartSchool, Dow Theory, https://chartschool.stockcharts.com/table-of-contents/market-analysis/dow-theory ; Cheol-Ho Park and Scott H. Irwin, The Profitability of Technical Analysis: A Review, AgMAS Project Research Report 2004-04, University of Illinois (October 2004), https://farmdoc.illinois.edu/assets/marketing/agmas/AgMAS04_04.pdf ; Andrew W. Lo, Harry Mamaysky and Jiang Wang, Foundations of Technical Analysis, NBER Working Paper 7613 (2000), https://www.nber.org/papers/w7613 ; Kresmion chart engine and Financials tab. The company and all figures in the worked example are hypothetical.

Kresmion Research.