There are many methods of evaluating the status and the mood of a specific security/specific sector of the economy. The two most common are a Fundamental Analysis and a Technical Analysis. By many, they are considered to be almost opposites.
However, it’s not really like that. They don’t compete but complement each other. Naturally, you’d want to pick one of them as your primary because otherwise, you’d spend too much time theorizing and not enough time trading and actually using your knowledge.
So, which one is better for you specifically: Fundamental Analysis vs Technical Analysis. Let’s find out.
What is Fundamental Analysis? The Fundamental Analysis, as you can tell from the name, deals with the security’s foundation – the company, its parameters, behavior, and role on the market. It’s a good way of understanding exactly what you’re investing into and see where the winds are going to blow in the long run.
This analysis deals with several parameters:
- The real value of the stock
- Its current value on the market
- The condition of the company
- The history of the company.
There are lots of things to consider. How does the company perform on the market? Does it underperform for its real value or does it outperform its actual worth at the moment as a result of some market phenomenon or craze, perhaps?
Will the company increase or decrease its profits in the months to come? Is the company about to face issues? Did it have these issues in the past? Did it have serious issues in the near past at all? These are the questions you need to ask, and then research all components that contribute to each of these respective factors.
What is Technical Analysis? The Technical Analysis is different in that it doesn’t care what the company’s inner values are and whether or not the security is actually worth like Apple but sells as something x10 cheaper on the market. What technical analysts care about are the current numbers.
When analyzing a security technically, you’ll want to examine:
- Supply and Demand
- Current Price
- Recent Historical Data.
There are many more of these current, numerical parameters. Analysts don’t just look at them and come up with the results magically, though. There are many techniques and technical strategies to get the correct answer. Some of them don’t work, but some are pretty truthful.
It’s here that people look at the charts and try to read them like a book. A lot of technical indicators and tools are used to make conclusions and attempt at explaining the current market situation. You don’t focus as much on absorbing the data and making sense of it as just remembering what different indicators and patterns mean.
Nonetheless, there is room for speculation and thinking in the realm of the Forex Fundamental Analysis process.
How do you analyze?
The ease of analyzing is very important. You’ll want to spend some time understanding what is even going on before starting to trade. But, you won’t need to spend too much time because, by the time you reach some sort of conclusion, the situation may change ten times over. It’s especially true for the Technical analysis.
The Fundamental Type allows more room for thought, though, both in terms of speculating and having enough time to reach a conclusion.
But how do you even analyze using either type? It’s not like it is common knowledge how to combine demand and volume to understand the trend. Well, the comparison of Fundamental Analysis vs Technical Analysis depends largely on you.
Fundamental analysis is made through a combination of raw numbers (such as company capitalization and trading history) and your own conclusions. From this, you can see the condition of the company, compare it to the others and see from subjective parameters whether the security is going up or down.
It’s not that hard if you make some effort. It’s true that you can simply look at a few facts, see the general consensus and leave the rest to your intuition. That’s very much realistic. But if you want to spend some time reading articles, projections, going through more numerical data, then you’ll be able to compile it all into a single conclusion.
Technical analysis is more objective, although you can still interpret the data however you please. It’s just that most analytical tricks are well-known and documented, so you’ll have a lot of advice in this regard. But just like the Fundamental Analysis, you can make little effort or spend more time studying the security properly.
You can simply glance at the supply, demand, volume, general trend direction, and finish there. For many people, that’s all you need. But others employ the help from countless indicators, look at the patterns, monitor the charts endlessly, and go through historical data to see familiar turns.
A lot of these analytical strategies are in open access. Many can be tested, but some can’t. In fact, a good portion of these strategies is a complete joke. They don’t work, which doesn’t stop people from creating new ones and then failing to deliver the results again.
How do you use the results?
In terms of Fundamental Analysis vs Technical Analysis, each has its own fertile soil.
As you can imagine, the Fundamental Analysis is great for longer-term investments. If you know that the company underperforms and will grow in the next months, it may be an indication that the nominal market value will grow soon enough.
Alternatively, the Technical Analysis is pretty good for shorter-term projections. The community has created many various ways of interpreting the movement of the charts, which often allows them to draw correct conclusions for the next several days.
That of course doesn’t mean that these two types are exclusive to long-term and short-term projections respectively. However, you can draw pretty believable conclusions for these respective spans of time very easily. To that end, these analytical types can co-exist.
You can check the company’s condition fundamentally and then proceed to verify it technically. Sometimes it won’t make sense, and it’s OK. However, when the results match, you’ll know that something is up.