There are only two main schools of concept and thought when we talk about the financial markets—is it Technical Analysis and Fundamental Analysis.
In technical analysis, the movement of the price of a specific security is the main focus so we can use this information to make an informed prediction or guess for its price movements in the coming days, months, or years.
On the other hand, fundamental analysis focus on “fundamentals” which are the economic factors. The trading industry is ever-changing, but these concepts and schools of thought are here to stay. Whether you are into forex trading or binary options trading, you just have to find the trading that suits your style and needs. Read more tips on Technical Analysis and Fundamental Analysis here.
Today we will provide you with more details and information about Technical and Fundamental Analysis trading—including how these two differ, their advantages and disadvantages, and how they can go well together if understood and utilized proper to examine securities in the future. We hope that this guide can help you get more familiar with the trading industry and the financial market.
First off, before we delve deeper into the subject, let us talk about their main obvious differences. Basically, fundamental analysts approach securities through financial statements while technical analysts start looking at securities from the charts.
Fundamental analysts are able to tell a certain company’s value and worth just by checking out their cash flow statements, balance sheets, and income statements. In finance parlance, analysts will try to gauge a specific company’s basic value. By using this method, investment and crucial financial decisions get easier to make because if a certain stock goes below its value, then it is already safe to assume that is indeed a good investment to make. This, of course, is how we can simplify how fundamental analysts do their job on a day to day basis but you get the idea.
On the other hand, technical analysts operate under the belief that it is of no use to scrutinize a company’s value because the company’s value is already included in its price in the stock market. Technical analysis traders believe that everything they need and have to know are already in the charts. This approach, though ironic to its name “technical,” can be considered direct, forward, and no-nonsense.
Next up, we discuss about the time horizons of both approaches. What is better in the long run? What approach yields faster and bigger profit in the end?
As you would have guessed, fundamental analysis trading would take more time to do since it is all about analyzing the market as a whole, which is so unlike technical analysis trading. Technical analysts can already be done in a matter of weeks, days even, fundamental analysts take their sweet time going over data and information from as far back as years and years to make sure they will make a really good investment decision.
The main differences in their time-frames that technical and fundamental analyses employ is actually an outcome of how unique their investing style is different from each other. Sometimes, it would take a really long time for a certain company’s value to show in the stock market. So when a fundamental analysis trader makes an estimate of the company’s intrinsic value, the gain is not yet realized until such time the market price has risen to its correct and more accurate value. This kind of investing is often referred to as value investing, and it operates under the assumption that short-term stock market’s price is wrong, but it will eventually correct overtime. Overtime is posed as a long period of time, as long as five years or more.
The numbers, data, and charts that fundamental analysis traders use are only made available over a really long period of time, perhaps this is because financial statements and the likes are only filed quarterly and sometimes earning reports are not available everyday like volume and price information.
Always keep in mind that these fundamentals are actually the characteristics of a company and business. New managements are unable to roll out drastic changes overnight since it takes months of preparation and planning to make a new set of product, do marketing strategies, and deal with supply chains. That is why fundamental analysis traders use this approach more often since it deals with a longer time-frame since the data and numbers they use to examine a specific stock is given to them in a slower pace and, more often than not, the data is more valuable and reliable.
Now that we are familiar with how fundamental and technical analyses work, we will get into details how critics think of the two schools of thought. Sure, these two are both popular, but who gets more vote from the critics and the experts? Which method provides more benefits?
Many critics from the trading industry see technical analysis trading as a sort of a black magic as they are skeptic of the legitimacy of it, up to the point that they would even mock those people who support and use it. It is in fact not until recently that technical analysis has gained some massive approval from traders, and in turn, gaining a much needed credibility. Both technical and fundamental disciplines are already being used even by many analysts based on Wall Street, so it does not hurt to try it out for yourself whichever works out better for you.
The question whether fundamental analysis is better than technical analysis is one without answer because you can actually find yourself excelling in a specific situation using one discipline and not gain anything using the other. Whichever you prefer, we hope that this article provided you with enough information and confidence to step out of your financial comfort zone. If you think we missed something, please leave your comments and suggestions down below. We would love to hear from you.
Images by Lorenzo Cafaro and energepic under Public Domains CC0
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