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A Beginner’s Guide to Fundamental Analysis and Technical Analysis

Fundamental and technical analysis are the main forms of analysis in the financial markets. Whether it is explicitly or implicitly, traders rely on both forms to formulate trading decisions.

Beginners are often confused about the similarities and differences between the two. A deep understanding can help improve trading decisions. All the similarities and differences will be discussed after defining each type of analysis.

Defining Fundamental and Technical Analysis

Fundamental analysis is when traders evaluate the value of a stock using its intrinsic value. The value is not based on market prices. The analysts treat the company as if it were unlisted. An opinion is primarily used to determine market prices. Fundamental analysis can be used, for example, to trade currencies.

Technical analysis is the evaluation of a trading instrument’s value based on its price and volume data. The objective of the technical study is to identify the likely scenarios. The concept is to analyze how the market participants acted in the past in order to project how they are likely to act in the future.

Factors that differentiate fundamental and technical analysis

 

Tools of trade

The tools of trade used in the fundamental breakdown are a company’s financial statements. On the other hand, technical inquiry uses charts.

Fundamental analysts look at the books of a company and determine its value based on factors like income statement, cash flow, and balance sheet. A technical analyst will instead ignore the financial statements and look at hints as to where the price is headed.

Time horizon

Fundamental scrutiny is long-term. This is why it is used in long-term trades, especially when discussing CFD trading. Investors need to wait for long periods of time before they can see a reflection of the company’s intrinsic value in the market. Furthermore, the reliance on financial statements means that investors have to wait for quarterly or annual reports of the company to guide their survey.

Technical breakdown is used both for the short-term and long-term. This is because stock charts can be accessed on a daily, weekly, monthly, or annual basis.

Trading vs. investing

The goals of fundamental and technical investigations are different. Technical analysis is for short-to-medium term trades. This means that the overall objective is to trade. It is different from the fundamental analysis, which is more focused on long-term investments.

Can they co-exist?

The two are viewed as opposing approaches to analyzing financial instruments. However, some investors and traders have experience in combining the two techniques to invest or trade. An example is when an investor uses fundamental examination to identify an undervalued stock, and also uses technical breakdown to predict entry and exit points.

A trader needs to analyze the market widely whenever using the two techniques simultaneously. Any choice concerning the type of analysis chosen should be guided by the financial instruments traded and the prevailing market factors.

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