Fundamental vs Technical Analysis: Understanding Key Differences

when you decide to invest in a market like stock, forex crypto, etc. you must obviously do thorough research and gather as much information as possible about the company. There are two ways to analyze the market Fundamental Analysis and Technical Analysis. If you have invested or traded in the stock market, forex market, or crypto market, then you must have heard about these two terms.

In this article, I will tell you what fundamental and technical analysis is and what is the difference between Fundamental vs Technical Analysis and we will know what are their advantages and disadvantages and whether can we use both of them for both trading and investment so let’s get started.

The objective of fundamental analysis is to assist investors in long term decision making with the help of financial statements to ascertain the actual value of stocks. On the other hand the purpose of technical analysis is to assist traders in making short term decisions with the help of chart patterns, indicators, etc. to identify entry and exit.

Introduction of Fundamental vs Technical Analysis

What is Fundamental Analysis?

Fundamental Analysis is a strategy where fundamental factors that influence the company, industry, and interest rate of the whole economy are examined well. with this analysis, we can assess the intrinsic value of any stock or commodity. And whenever during any correction, if the stock becomes available below its intrinsic value, then we can invest in it. Fundamental Analysis (FA) checks how healthy a particular company is as compared to its competitors. If you choose fundamental analysis then you also need to perform the economic analysis, industry analysis, and even the company analysis.

Fundamental Analysis is divided into two parts, first is qualitative analysis and second is quantitative analysis.

Qualitative Analysis

In qualitative analysis, we analyze those things which we cannot know in terms of numbers. Such as how is the business model of the company, what business does the company do, how good are the company’s products and services, how many competitors are there, and how good and how far ahead are they from the competitors, how is the management of the company, What are the future plans, how good is the company’s brand image in the market, all these are analyzed in qualitative analysis so that we can know the quality of the company. Qualitative analysis may differ from investor to investor as it cannot be expressed in numbers.

Quantitative Analysis

In quantitative analysis, we talk about those factors of the company which we can know in the form of numbers. In this, numbers are analyzed to see the financial condition of the company, such as the financial statement of the company, which is seen in the balance sheet of the company, the profit and loss statement of the company, the cash flow statement of the company, we know many similar ratios. The sales growth and profit growth of the company can be analyzed so that we can know the financial health and profitability of the company.

How good the company is in quantitative analysis is the same for every investor because here we get to know the analysis in the form of numbers. Friends, if you want to become a successful investor, then you must know how to do fundamental analysis. If you want to make a good profit in the long term, then it is very important to keep in mind that the company is very good in both qualitative analysis and quantitative analysis.

what is Technical Analysis?

Technical analysis, on the other hand, can help to predict the future price of any stock and all of these predictions are based on the past performance of the stock. Technical analysis tells us directly about what to buy, when to buy, and when to sell, which is the most important thing to make money in the market. But when we use Technical analysis, we always need to remember the 3 basic assumptions of it, which are; the market discounts everything, price moves in a trend & history repeats itself.

There are various tools and indicators used in technical analysis such as Chart Patterns, Trend Lines, RSI, Moving Averages, MACD, Support & Resistance to identify entry and exit for trades.

Trend Line
Trend Line

Chart Pattern

Certain patterns form on the charts, with the help of which traders and investors predict the future price movements of stocks, currencies, commodities, and crypto. There are two types of chart patterns :- 1. Reversal Pattern 2. Continuation Pattern

Reversal Pattern

Reversal chart pattern means those chart patterns after the formation of which the market can change its trend. Reversal chart patterns include head and shoulder, rising wedge, inverted head and shoulder, falling wedge, double top, double bottom, triple top, triple bottom, round top and round bottom, etc.

Triple Bottom - Reversal Pattern
Triple Bottom – Reversal Pattern

Continuation Pattern

Continuation chart pattern means those chart patterns after which the market can continue its trend. Continuation chart patterns include rectangle, triangles, flags and Pennants, etc.

Technical Indicators

Technical indicators play a vital role in enhancing the accuracy of candlestick patterns and chart patterns and in guiding market trends. Technical indicators are the most important part of technical analysis. There are hundreds of technical indicators in technical analysis, almost all of them work at some time or the other, but each indicator does not always work, if each indicator always works, then each trader will use it.

The names of some important indicators used in technical analysis are MACD, Bollinger Bands, Moving Average, RSI, Stochastic Oscillator, Super Trend and ADX. Most of the indicators are divided into two parts :- 1. Leading Indicators 2. Lagging Indicators.

Leading Indicators :- This indicator behaves just like its name. These indicators give information about whether the market is overbought or oversold. This indicator is very beneficial for those traders who buy or sell for a short period of time. Leading indicators mainly include RSI and Stochastic Oscillator.

RSI and Stochastic - Leading Indicator
RSI and Stochastic – Leading Indicator

Lagging Indicators :- Lagging Indicators are trend following indicators. These indicators work very well in long term trends. It cannot predict the future price, but it tells in which direction the market is going. Lagging indicators mainly include Moving Average and MACD. The biggest advantage of lagging indicators is that it has the ability to catch the trend.

MACD and Moving Average - Lagging Indicator
MACD and Moving Average – Lagging Indicator

Differences Between Fundamental and technical Analysis

BasisFundamental AnalysisTechnical Analysis
RelevanceFor Long Term InvestmentFor Short Term Investment
Decision TypeWhat to buy and sellWhen to buy and sell
ObjectiveTo find out fair value of securityDetermine correct time of entry & exit from the trade
Data UseUse both past and present dataUse past data only
Data SourcesUses annual reports, news, economy’s statistics, etc.Relies on chart analysis
TypesLong term position traderShort and Medium term trader
FactorsIdentify undervalued or overvalued stocksDetermines right time to buy or sell stock
ApplicabilityLengthy and time consuming processQuick Method
FunctionUseful for Trading & InvestingUseful for Trading Only

Pros and Cons of Fundamental Analysis

Pros

  • Because FA is generally used for a long-term investment, where the power of compounding is always in favor of investors.
  • Through FA we invest only in financially sound companies because of which we are out of risk of losing our money.
  • Investors who focus on generating income often rely on fundamental analysis to identify companies that consistently make profits and have the potential to pay dividends in the long run.

Cons

  • FA’s methodology is very lengthy and complex and we have to put a lot of time into it.
  • The biggest con of FA is that you can enter “good stocks” at the wrong time.
  • Fundamental analysis might not provide accurate short-term price predictions, as it’s more focused on long-term trends and underlying financials.

Pros and Cons of Technical Analysis

Pros

  • TA is comparatively a faster method, and it is even less laborious as compared to FA to identify a good stock.
  • By using Ta’s strategies you can define a perfect entry and exit time into any stock, commodity, currency, or crypto in advance.
  • In TA technical indicators immediately give you an indication for buying and selling.

Cons

  • Many traders use multiple indicators at the same time and then they get confused about which is the best indicator.
  • In Technical Analysis, the company’s financials are not taken into consideration and hence it’s possible that you might have invested in a financially unhealthy company. But even here you can save yourself from losing your capital by following the correct SL or exit levels.
  • And lastly, Technical Analysis demands a lot of accuracy and discipline so it’s important that you learn this skill from a reliable technical analyst and make an entry into the market.

Technical analysis vs fundamental analysis: which is better?

  • In FA complete financials of the company such as the balance sheet, P&L Statement, Cash Flow Statement, its management, competitors, products, economy, and industry are analyzed in detail. On the other hand, in TA we do not check any of the financials. This only predicts the company’s price, volume, and simple economic concepts such as good stocks on the basis of demand and supply. TA uses chart patterns, candlesticks, and various indicators, in order to find out about the future price and the trend of any stock.
  • Where the FA is used for long-term investments. On the basis of TA, you can even do intraday, short-term trading, medium-term investments and momentum investing as well.
  • Fundamental Analysis is macro in nature as it studies the economy, industry and company where Technical Analysis is micro in nature as it concentrates on the charts and price movement of particular stocks only.
  • FA focuses on finding the intrinsic value of the stock, Because the stock that is trading lower than its intrinsic value is considered to be a good investment for any value investor. And at the same time, according to the TA, there is no need to understand the intrinsic value of any company, because in TA ” Price is God”, means, the stock price already includes all of this info in itself. TA predicts the future performance of the stock based on its past price trends and this is used to understand the right time for entry and exit from the stock.
  • Fundamental Analysis studies the economic and financial indicators. Technical Analysis studies the historical price movements and chart patterns.
  • In FA investor generally decide what they have to buy or sell because they are making investment for long period of time. But incase of TA investor generally decide the timing when they have to buy or sell they have to choose appropriate time to buy or sell a particular security.

Conclusion

So Friends, this was the complete difference between the Fundamental Analysis and Technical Analysis. The investor should do fundamental analysis and the trader should do both to make good profit. Both the analysis has only one function that the trader and investor can use them to make profit. I think now all your doubts have been cleared regarding what is fundamental and technical analysis, what are its advantages and disadvantages and which of these two analysis should be used by the trader and investor. Friends, tell us in the comment section which analysis do you like to do.

FAQ :- Fundamental vs Technical Analysis: Understanding Key Differences

Which is more effective: technical analysis or fundamental analysis?

It depends on whether you are a trader or an investor. If you are a trader, you can use both, but technical analysis is more effective for intraday traders and short-term traders than fundamental analysis, and if you are an investor, then fundamental analysis is effective as compared to technical technical analysis.

Can we use technical analysis and fundamental analysis at the same time?

Yes, You can use technical analysis and fundamental analysis at the same time.

Should I learn technical analysis or fundamental analysis first?

If you want to do intraday trading or short-term trading, then you have to learn about technical analysis. But if you are an investor and want to invest in the market for a long time, then you must learn fundamental analysis. And if you want to do both trading and investing, then you should learn both technical and fundamental analysis.

What should I learn first in stock market – fundamental analysis or technical analysis?

In stock market first you should learn basics of stock market and then fundamental analysis and lastly technical analysis.

What is fundamental and Technical analysis of stocks?

Fundamental Analysis is a method of evaluating the intrinsic value of a stock to find opportunities in the market for long-term investing. Technical Analysis is a method of examining past price movement of a stock to forecast future price movements with the help of tools and indicators.

Which is better between technical and fundamental analysis?

It depends on your investment goals and strategies. If you want to earn money quickly, then you can earn money every day by trading using technical analysis. But the investor has to wait for a long time for the profit because if any investor invests, he invests not for a few days but for years.

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