The Difference between Technical and Fundamental Analysis

Traders and investors often miss the merits of technical or fundamental analysis when they choose to work over one or the other. So which one is better to use the other one? Can they be used together?

In this article, we will explore the difference between technical and fundamental analysis and the tools you can use for each analysis method to help you decide which analytical tool is better for you. But, let us begin by understanding what technical and fundamental analysis is.

What is Fundamental Analysis?

Fundamental analysis is a method of evaluating the intrinsic value of a company’s stock. This form of analysis is essential because little regard is given to the market prices of companies. Most companies are valued as though they are unlisted in the stock market.

Hence, the decisions to sell or buy them are determined by whether the stock is trading at a premium to its value or at a discount. However, although the stock’s value is often an opinion, undervalued companies can perform well long term.

Fundamental analysis is not only used for evaluating the value of companies. It can also be applied in other markets such as commodities and currencies. Thus this method of analysis considers all factors that affect the value of the asset.

What is Technical Analysis?

Technical analysis, on the other hand, is based on volume data or stock price. This analysis method is used to identify a scenario that could most likely occur rather than predicting the future. Technical analysis uses price action. Using price action, you can locate the cost of something in the future using church trends and patterns and trends, resistance and support levels, volume, and price behavior which assist you to identify trade opportunities with positive expectations.

It is important to note that the technical analysis only involves statistical data and does not indicate how the players in the market or the economics have influenced or affected the price now or will in the future.

Difference between Fundamental and Technical Analysis?

The difference between the two analysis methods boils down to what factors determine a stock’s price and value. While the fundamental analysis considers the value of the company based on the value of the stock’s assets and the profits that it can generate. Fundamental analysts often try to get the trading price of a stock and its actual value.

Technical analysis, on the other hand, is determined by the price action. The price action allows a trader to have a sense of the supply and demand dynamics affecting the stock price. This method of analysis is only concerned with the volume data and price.

Tools You Can Use for Fundamental Analysis

Fundamental analysis is more concerned with a company’s financial position, operation, factors that affect its performance, competitors, and the economy. Hence, the most essential data source for a fundamental analyst is the company’s financial data, such as balance sheets, income statements, and cash flow statements. However, other sources of information are valuable to fundamental analysts. These include metrics and ratios, which reflect on the company’s performance, i.e., its growth and health rate.

Data on the economic factors affecting the business performance, such as retail spending and interest rates, also assist in forecasting the future growth of the company. The fundamental analysts find the fair value of a company by comparing data from all these sources.

Tools You Can Use for Technical Analysis

Technical analysis is much broader than you might think. Analysts could get information from candlestick charts, bar graphs, line charts, etc. In forex, some analysts use tolls like moving averages and oscillators to calculate the price of the stocks.

Other analysts use complicated analysis frameworks such as the market profile and the Eliot Waves to measure momentum and identify the entry and exit positions when trading and price trends.

Conclusion

There are two categories of stock analysis, fundamental analysis, and technical analysis. Fundamental analysis is more concerned with the difference in a stock’s value and the price it fetches during a sale. Fundamental analysts use data such as financial statements, interest rate, retail spending, ratio, and metrics to find the company’s fair value.

On the other hand, technical analysis is more concerned with the supply and demand metrics affecting the price of a stock. Technical analysts use information such as price charts, moving averages, and oscillators to calculate the price of a stock and identify trends and entry and exit points.

Traders and investors often miss the merits of technical or fundamental analysis when they choose to work over one or the other. So which one is better to use the other one? Can they be used together? In this article, we will explore the difference between technical and fundamental analysis and the tools you can…

Traders and investors often miss the merits of technical or fundamental analysis when they choose to work over one or the other. So which one is better to use the other one? Can they be used together? In this article, we will explore the difference between technical and fundamental analysis and the tools you can…