Investment : Fundamental vs. Technical Analysis

Now before we start understanding the difference between Fundamental Analysis & Technical Analysis, we must know what they mean

 What is Fundamental Analysis?

Fundamental analysis aims to find the firm value of the company. This means arriving at its true price. Such kind of analysis uses economic factors for analysis.

 So if you are using the Fundamental Analysis method be sure to use the following analysis.

          · Industry Analysis

          ·  Company Analysis

          ·  Economic Analysis

This Investing technique is majorly opted by Buy, Hold and Value investors.

What is Technical Analysis?

Technical analysis is majorly based on stock price or volume data. Here the objective or the main goal is not to determine or predict the future, but to identify the most likely scenarios.

Technical Analysis uses chart patterns & trends, price and volume behaviour to identify the trading opportunities with most likely expectancy. 

It’s important to focus on the actual price of the stock, not the financial health of the company or the industry or economy. When using technical analysis, you are assuming all the relevant information that is already in the pricing history.

Why to Ignore Fundamental Data?

Technical analysis ignores fundamental data not because they are irrelevant but due to the fact that the the market price of a stock discounts these fundamental factors through the actions of buyers and sellers and, hence, there is no need to analyse them again. The rule of this method is that ‘price captures everything.

The 3 Golden Rules:

·       First Rule- All information is available to the public i.e. Price Discount.

·       Second Rule- Price movements are not random. Trends behind the price action can be formed by using Technical tools.

·       Third Rule- Price Trends are likely to repeat themselves.

Comparison between Both

                  Which one is better? 

A key distinction between technical analysis and fundamental analysis is that the technical analysis uses more concrete and actual data, primarily price and volume data. 

The financial statements analyzed under fundamental analysis are not objective data but are the result of numerous estimates and assumptions that have been added together to arrive at the line items in the financial statements. 

Fundamental analysis is more theoretical because it looks to determine the long-term value of a security.

Technical analysis can be considered the more practical because it studies the markets and financial instruments as they exist, even if trading activity appears, at times, to be irrational.

Ø To conclude, fundamental and technical analysis are both useful and valid, but they approach the market in different ways. You can use any one of the above or both as long as you are making money.

Author - Harsh Bhushan