Fundamental Analysis vs Technical Analysis: Trading opportunities in the market are not easy to understand and grab; investors have to research, study, use various analysis tools, etc., for productive investment. There are a number of markets and trading instruments that could be traded for earning profits.
The forex market, stock market, commodity market, indices market, metals, and cryptocurrency market. All these have several opportunities to trade and make the best out of the capital invested.
However, traders should be aware that for trading, investors not only put in funds in the instruments or markets, but they also have to work on many aspects of the trade. For this, they have to study the market and instruments, do background research of the trade history of instruments and what future benefit it ensures. To have all such data traders have to analyze them, which could be done with two types: fundamental analysis and technical analysis.
Both the analysis types are different from one another thus, serving two different purposes of trade. Fundamental analysis is for the study of environmental market factors that impact the trading instruments like the financial statements, economic factors, income statement, production, cash flow statement, demand and supply, balance sheet, etc.
While the technical analysis is related to the price of the traded instrument, giving an idea about the price of the security and in which direction the trader should invest. It includes the following factors such as price movements, chart analysis, chart patterns, past data, stock’s price, etc. A trader can use them to get a better knowledge of the market and get an investment analysis.
What is Analysis?
Before jumping to the two types of analysis, that is fundamental analysis and technical analysis. Let’s understand what analysis means to have a clear knowledge of the trading world and its factors. Analysis tools are a significant part of any investment or research conducted as they help the individual to make sense of the data collected for study.
Thus with the data and its analysis, traders can make assumptions and make reports on the results expected out of the data. For an investor of the financial market, the analysis depends on the instrument and its aspects. Traders study the market position and elements that impact the market and its instrument to invest their funds.
An analysis is further divided into various types depending on its use. For the financial market investors, it is of technical analysis and fundamental analysis. The article focuses on these two analyses and how traders can use them for a beneficial investment.
The fundamental analysis is the type of analysis that studies the market factors that impact the future price movements of the security traded and their supply and demand in the market. The analysis incorporates a number of elements listed below:
- Company’s Financial statements
- Economic calendars
- Cash flow statements
- Financial markets
- Industry statistics
- News events
The traders can consider all these factors to identify trading opportunities and other underlying fundamentals for a better market interpretation. For the market analysis, traders can even take the help of fundamental analysts who have a good market understanding.
To have a clear picture of the fundamental analysis, let’s understand it with an example. Suppose an investor wants to trade in the stock market and is not aware of the factors impacting the stock price and volume data. So, in this case, they can use the fundamental analysis tools for trading. Fundamental analysis considers the supply and demand of the trading instrument.
For knowing the increase or decrease in the supply and demand of the instrument, traders will study the inventory reports and all those factors associated with fundamental analysis. This will help the trader know the future position of the instrument and what benefit traders can enjoy.
Technical analysis focuses on the past data and the present data of the traded instrument. With the data, traders can analyze the price of the traded instrument and predict future price movement. Technical analysts use the intrinsic value of the instruments to forecast their movements to trade. The data of technical analysis considers only past data to understand the market price of the instrument.
The technical analysis type uses the charts and patterns of the price of the trading instrument created for deep market analysis. This gives traders knowledge of price movement, historical price movements, whether the investment is a long-term investment or short-term. Price trends are the essential part of technical indicators as these formed on charts give an idea of the fair value of the security and market conditions.
Technical analysis refers to the visual representation for its technical indicator and the patterns formed on the chart analysis. Thus, illustrating the movement of price and price action in the future for getting a major difference of change in the market position of the instrument.
Fundamental Analysis vs Technical Analysis
Fundamental analysis vs technical analysis focuses on market price movement. The two analyses have one motive of educating the trader about market changes in security due to the various factors of the market. The financial market is volatile, and the risks associated with it are also high. So, for a trade that profits the investors traders have to use the technical and fundamental analysis.
The two are different as one analysis the past data, and the fundamental analysis focuses on the environmental factors. Technical analysis takes the help of technical analysts, and the fundamental analysis uses fundamental analysts that are professionals who have knowledge of the market price and the elements that are making the change take place.
Here, we have compared the fundamental analysis vs technical analysis from a broader perspective. Giving key differences between the two:
The basic difference between the two analysis tools is that fundamental analysis aims at bringing to knowledge the aspects of instruments’ financial performance. Whereas technical analysis takes the price of the security to understand the pattern of movement. For example, the stock price is viewed on the charts to analyze its next move.
The two analyses have different functions to perform for the investors. Fundamental analysis functions in order to give investment-related understanding; on the other hand, technical analysis is used for trade-related decisions.
Both the analysis tools have different time frames, which make them different from one another. Fundamental analysis is relevant for long-term investments, while technical analysis is good for short-term traders.
The data used for the analysis of the market price movements of the security are different for the two. In fundamental analysis, the investors take into consideration previous and present data. In contrast, the technical analysis focuses on previous data.
Fundamental analysis aims at identifying the intrinsic value of the security traded. In comparison, technical analysis is used for identifying the right time to invest or withdraw from the market.
The methodology of fundamental analysis is that it focuses on the ongoing trends of the market, economic outlook, industry statistics, competitors’ position, etc. Technical analysis is used by the investors to understand the market psychology along with the price movements.
Source of Data
The data for fundamental analysis is sourced from economic reports, news, and events, financial statements, brokerage analysis, management processes, etc. While the technical analysis uses chart analysis for its analysis.
Fundamental analysis is based on the concept of return on assets and returns on equity. Whereas the technical analysis is based on the concept of price data and Dow theory.
Types of Traders
Fundamental analysis vs technical analysis also has key differences of the traders using them. Fundamental analysis is used by long-term position traders, while technical analysis is preferred by short-term traders.
Fundamental analysis is not impacted by the external news, while technical analysis has an impact on the external news.
Fundamental analysis uses the indicators such as expenses, liabilities, debts, revenues, etc. Technical indicators are moving averages, charts for price data, etc.
Process of Fundamental Analysis vs Technical Analysis
The steps involved in fundamental analysis vs technical analysis are different as both work for different purposes. The paragraph has discussed the process of conducting fundamental analysis and technical analysis for easy understanding of the readers.
Fundamental Analysis Process:
The first step of fundamental analysis is the industry analysis, where traders find out everything related to the industry and its factors which give an insight on the GDP contribution, demand and supply analysis, sector contribution, and trends of the sector.
The second step is having a company analysis which will help traders understand the operations of the company with ratio, vertical and horizontal analysis of the reports. Analyze the trends, study the balance sheet and other income statements. Thus, interpreting the position of the company in the industry.
The next step is performing the financial modeling where traders can forecast the future position of the company, make assumptions and understand the future price of the security traded.
The final step of fundamental analysis is valuation analysis; this helps the traders get the intrinsic value and compare these with the market prices for a position idea of the investment. Traders can use the valuation techniques that are dependent on the industry or the company, such as the SOTP valuation, which is used by many traders.
With the last step, traders can get knowledge of whether they should sell or buy the instrument. If the market price is more than the intrinsic value, then traders sell as it is overvalued, and when the intrinsic value is more than the market price, then traders buy as the instrument is undervalued. Hence, easily taking the buy and sell decisions.
Technical Analysis Process:
As the fundamental analysis vs technical analysis is different, so is their trading process. Below discussed is the process of technical analysis for investors:
The technical analysis starts with a little research on the assets that trader wants to invest in their funds. Traders can study the facts, market future prices of the security, price trends, etc., for analyzing securities. This is the major and initial step of the technical analysis process.
The following step is to find the best trading strategy that will help investors achieve their desired goals. It is not necessary that one strategy will be suitable for all the market instruments; the stock market may have a different trading strategy while the forex market has another. Traders can even use a combination of trading strategies for profitable results.
The third step is trading accounts; traders can have a brokerage trading account with online brokers such as PrimeFin. The trading account will provide the trader with market access, carry out trade functions with trading platforms and tools that support the trade. Thus, beneficial step for traders as these also have leverage facilities and professional customer services.
Understanding the Tools and Interfaces is the fourth step that traders have to carry out for technical analysis use. Traders should use those tools that support their trading strategies and trading instrument. They can try the trading tools and check their impact on the market assets.
Traders should first use the demo account to practice the trade as they will be able to know the market, their impacts, and what technical indicators will suit the instrument for a good market return.
The last step is to set the stop-loss; this will help the traders minimize their trading loss and have a profitable trading experience.
Advantages and Disadvantages
Fundamental analysis vs technical analysis have key differences, but they both individually have benefits and losses for the investors. Traders can know the points of advantages and disadvantages of fundamental and technical analysis.
- Uses a systematic approach
- Gives better understanding
- Analyses all the economic and other factors of the market
- Uses the sound financial data for analysis
- Removes personal bias
- Trades on assumptions
- Tells when to enter and exit the market
- Gives current market information
- Trading patterns gives direction
- Provides insights on the trade volume
- The use of several indicators makes it difficult
- Do not consider the fundamental aspects
Financial market participants always look for the future prices of the instruments before investing. The process requires the study of technical and fundamental factors of the market, which is done using fundamental and technical analysis tools. These give investors an idea of the market trading position of the instrument, whether the trader should invest in long-term or short-term investment, and all the factors that impact the trade.
With the article, traders can know which trade analysis will be beneficial for their market instrument and how they can apply them for the results. Here are the Top 7 Best Technical Analysis Books which can help you in trading.