Technical analysis vs. Fundamental analysis
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 you want to follow will greatly impact how you develop as a trader.
Fundamental analysis is an methodology that seeks to measure the actual value of an asset under study. In a bid to measure the intrinsic value of security understudy, fundamental analysts review all the factors right from the economy to industry conditions, 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, management as well as competition, and core business.
Fundamental analysts also pay close watch to the overall economy as well as industry developments, which might affect the core business of a company.
Technical analysis, on the other hand, 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 security or market are the only 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 in a bid to try to predict how the price is likely to move by relying on price patterns.
Unlike fundamental analysis, technical analysis does not, in any way, try to validate the intrinsic value of a market or security. 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 upon 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 while 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 analysis 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 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 investors as it involves focusing 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.
Extra: link technical and fundamental analysis together
To become a Forex Master, 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.
- So, you look at your charts (technical) and you find an opportunity that looks opportune. 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 into the opposite direction and you see a loss of 40 pips. What happened? Well, the interest rate just declined on the currency pair you were holding a strong position in, and the currency weakened. You put too much emphasis in 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 fail-safe your trades at the same time.
Invezz has courses which help you master both fundamental and technical analysis strategies.