Technical and fundamental analysis are the two schools of thought applied when approaching the forex market. These two methods are applied when researching and by investors when gauging the trends in the market. The supremacy battle between the two has lasted for ages, but whichever route you take; the goal is always the same. As a trader, you can opt to use one or even combine the two approaches in your trading.
Fundamental analysis, on one hand, involves evaluating a stock or a security by gauging its intrinsic value. Fundamental analysts will look at all factors surrounding certain security. They will look at the overall economy, conditions in an industry, the management of companies as well as the financial conditions.
For the technical analysts, trading volume and historical prices of securities are the only inputs. The assumption is that all fundamental factors such as the market conditions are factored in the price of a security. It is therefore not necessary to do fundamental analysis. Instead of identifying the intrinsic, the technical traders believe in patterns.
Technical traders will normally begin with their trading platform; fundamental analysts, on the other hand, will begin with company financial statements. The trader or analyst in such a case tries to gauge the value of a stock by assessing its performance. Technical analysts believe patterns can be used to obtain future trends of a security.
Period of analysis
Fundamental traders are long-term traders. They will wait for a long period for the intrinsic value to be reached. On the same note, fundamental analysts will look at data of several quarters to make informed decisions. Technical traders do not in most cases take a long-term approach. In most cases, trades will be closed within a few minutes to a few weeks. The analysis too does not take long; historical data considered could be a few hours to 3 months old.
Trading vs investing
The two trading approaches have different goals. Technical traders try to seize small opportunities within the market, fundamental traders are investors, and the expected benefits can only be realized in the long term. Technical traders aim to buy, hold for the security to gain value, and then dispose at a profit in the short run. Fundamental traders will invest in the future of a company; their goals are long term.
Whiles the fundamental traders analyzes financial statements, quality of the management, the growth of the company and earnings, the technical traders believes that market behaviors will keep repeating. Fundamentalists make subjective decisions based on the amount of information at their disposal.
The usefulness of technical and fundamental analysis
Fundamental analysis is essential when you want to identify undervalued or overvalued securities. This method of market analysis makes a comparison of the market and the intrinsic value. Intrinsic value is the true value of a security after considering its tangible and intangible aspects. Technical analysis can be applied when trying to identify entry or exit opportunity.
In fundamental trading, there are no assumptions. Information is based on real facts and information available to an investor. Technical analysts will normally make some assumptions in their decision making. Technical trading is based on the following assumptions:
- The market discounts everything
- Price move in trends
- History keeps repeating itself
So which one is fit for you?
|Technical Analysis||Fundamental analysis|
|Requires a high level of expertise||Suitable for even traders who are not very skilled|
|Suitable for traders with short-term trading goals||Suitable for investors with a long-term goal|
|Suitable for the high-frequency traders||Not suitable for frequent traders|
|Not a very suitable option for the risk averse||Suitable for the risk-averse traders|
If you are planning to be a technical trader, you should be willing to invest your time. Fundamental trading does not require a lot of time in the market. Fundamentalist are slow in decision making and low appetite for risk