Technical and fundamental analysis are research techniques undertaken by traders and investors while looking for opportunities in the capital markets. While both of them are geared towards forecasting market trends, they differ a great deal. Deciding which technique you want to follow will greatly impact how you develop as a trader.
Fundamental analysis is a methodology that seeks to measure the actual value of an asset under study. In a bid to measure the intrinsic value of a stock, fundamental analysts review factors ranging from the broad economy to industry conditions to earnings as well as expenses and liabilities that might influence the underlying value of a security or asset.
Fundamental analysis is a detailed examination of all the factors that might influence the value of a security. Some of the factors analysed as part of fundamental analysis include financial statements, quality of management, and the competitive landscape a company faces.
Fundamental analysts also pay close attention to the overall economy as well as industry developments, which might affect the core business of a company.
Technical analysis is a market analysis technique that tries to ascertain the value of a security by focusing on market activity. In technical analysis, the price and volume of a given stock and the broad market indexes are the only relevant inputs.
Technical analysts maintain that all fundamentals that have the potential to influence price are already priced in. That way, they only analyse past price action activity to try to detect patterns and then predict how the price is likely to move.
Unlike fundamental analysis, technical analysis does not try to validate the intrinsic value of a stock. Instead, such analysis focuses on charts as analysts try to identify patterns as well as trends that suggest how the price will perform in the future.
Some of the factors looked at in technical analysis include
- Trading volumes
- Historical share process
- Industry trading trends
Technical Analysis vs. Fundamental Analysis
|Comparison||Fundamental Analysis||Technical Analysis|
|Meaning||Practice of analyzing securities’ intrinsic value||Practice of predicting future price by relying on stock charts to identify patterns and trends|
|Relevance||Long-term investments||Short-term investments|
|Decision Making||Decisions made based on underlying fundamentals||Decisions based on market trend and price patterns|
|Data For Decision Making||Economic reports, earnings reports, management, industry trends||Charts only|
|Focuses on||Past and present data||Past data only|
When choosing which methodology to deploy, it is important to consider your overall investment strategy. Fundamental analysis is an ideal methodology for investors looking for long-term investments. Technical analysis, on the other hand, would be best suited for short-term investments.
By focusing on fundamentals likely to influence intrinsic value, then investors are essentially trying to predict how the security would perform in the future. In contrast, focusing on market trends, technical analysts try to predict price movements in the short term.
Fundamental analysis is best suited for longer-term investors as it focuses on longer periods as a way of ascertaining long-term value. In contrast, technical analysis is best suited for traders looking to make short-term profits based on price movements.
Link Technical and Fundamental Analysis Together
To become an expert stock investor, you need to know how to effectively use both types of analysis. Let’s look at a few points that show how focusing on just one type of analysis could turn into a disaster.
- You look at your charts (technical) and find an opportunity that looks promising. You think “wow I’ve never seen an opportunity this great”.
- Then with full confidence you immediately proceed to enter trades with your brokerage.
- Shortly after the trade has been opened, prices move in the opposite direction and you suffer a loss. What happened? In this case, the company announced that it’s lowering its earnings estimate for the current quarter. Turns out you put too much emphasis into technical analysis, and forgot the fundamentals.
By using both types of analysis together, you can make smarter decisions that back each other up from both perspectives and fortify your trades at the same time.
Invezz offers many courses which help you master both fundamental and technical analysis strategies.