Technical and Fundamental Analysis Comparative Analysis

If you have just started on your trading journey, read on to know more about technical and fundamental analysis.

Fundamental analysis is used in the calculation of a share’s intrinsic value. This is done to find opportunities that have a different share value from the present market value. To be able to do this successfully, fundamental analysis observes economic factors called fundamentals. Fundamentals can be obtained from financial reports and reports regarding different macroeconomic variables and indicators.

On the other hand, Technical analysis helps in the prediction of future market share prices. It does this by using that share’s past performance statistics. It is of the assumption that stock price pattern movements are repetitive. Therefore, it can predict the best time to sell and buy.

Difference between both types of analysis

·        How they work

Fundamental analysis calculates a share’s future value via different fundamentals (economic variables). It is of the assumption that share prices, in the short term, do not correspond with their value. It will, however, correct itself in the long run. As such, purchasing shares at a lower price than the true price or selling shares at higher prices than the actual value will earn you profit. An example of an investor who made good use of fundamental analysis is Warren Buffet. He valued investing in undervalued shares. He would then wait, sometimes for an extended period of time, for the prices to reach a certain level before selling. As such, fundamental analysis is mainly used for investments.

Technical analysis is of the school of thought that all essential fundamental factors can be seen in the price of shares. Its focus is on the trading volume and share price, presented and measured at various graphs and tables.

Proper analysis of these graphs will give you information about some price movement trend regularities and formations. The methods and nature of technical analysis make it more suitable for short-term trading and is thus used for trading functions.

·        Time Horizon

Stock analysis using fundamental analysis takes longer as compared to technical analysis. Technical analysis can use months, weeks, or even days, whereas fundamental analysis uses several years.

This implies that those investors picking a stock with values that’ll increase in years to use fundamental analysis. Such investors believe that prices are bound to increase by choosing the right stock, even if it takes years to happen. In contrast, technicians are looking for shorter-term investments.

·        Financial statements vs. Charts

Fundamental analysts use financial statements as their source of information. Technical analysts use price movement charts as their sole data source. Fundamental analysts analyze income statements, cash flow statements, and balance sheets. Technical analysts, however, believe that all the information you need can be found in stock price charts.

Criticism towards both types of analyses

Some critics have been heard terming technical analysis as black magic. As a matter of fact, technical analysis just recently started enjoying mainstream credibility. Its criticism is drawn from an economic theory. Many academics believe in the efficient market hypothesis and thus question these two analyses.

Combining technical and fundamental analysis 

There are many different ways of combining both of these analyses, thereby getting one holistic trading strategy. Here are some of the different ways you can combine them to get a richer insight when making trading moves:

• Combining fundamental analysis with range-bound trading: range-bound trading identifies market price channels traders can use to sell higher trendline resistance and buy lower trendline support.
• Combining fundamental analysis with breakout trading: Breakout strategies involve price capitalization of outside moving instruments of an already defined trading range.
• Using fundamental analysis with oscillators: Oscillators are technical instruments to identify short-term oversold/overbought conditions.

Technical analysis is highly informative when it comes to analyzing markets. However, fundamentals do also play a vital role in the bigger picture.

Conclusion

Traders have the option of experimenting with many different analyses techniques individually and then, use them combined. Both analyses have pros and cons, and using them together is a sure bet on optimum results. That way, you’ll be able to know the best trade strategy for your type of trade. It is highly recommended that you try them out first on a demo account before entering live trading.

 

 

 

If you have just started on your trading journey, read on to know more about technical and fundamental analysis. Fundamental analysis is used in the calculation of a share’s intrinsic value. This is done to find opportunities that have a different share value from the present market value. To be able to do this successfully,…

If you have just started on your trading journey, read on to know more about technical and fundamental analysis. Fundamental analysis is used in the calculation of a share’s intrinsic value. This is done to find opportunities that have a different share value from the present market value. To be able to do this successfully,…