If you are relatively new to the world of trading and investing, you will frequently hear reference to the terms technical analysis and fundamental analysis but have relatively little idea about how these forms of market and stock analysis differ from each other. This post will help you decide which is right for you, Technical analysis vs fundamental analysis.
What is technical analysis?
Technical analysis is used by traders who are sometimes called ‘chartists’; this is because they rely on a range of charts and market indicators to try to predict which way markets are going to trade. There are a broad range of technical indicators used to analyse the direction of markets and whether a particular pattern is evolving.
There is a big debate over whether technical analysis can really benefit traders over the long term – does it really work? The fact that so many traders and analysts use technical analysis vs fundamental analysis makes it somewhat of a self-fulfilling prophecy. If enough forex or stock market traders are looking for the same patterns and reacting to them, then sometimes the market will conform to these.
Fundamental analysis involves looking at the fundamentals of an investment – what is likely to drive its price in the future? This usually involves data other than the price. For example, if using fundamental analysis to examine a stock, you would be researching metrics like the company’s debt and relative profitability.
As a rule of thumb, fundamental analysis is used for stock market trading and investing, but it can apply to other markets like forex. This is why there is so much interest in what central bankers say and the output of economic data from governments. These are good examples of the sorts of information used for fundamental analysis.
So which approach works for you?
When assessing technical analysis vs fundamental analysis, it is worth considering the type of investment strategy you intend to adopt. There are many traders, especially in the forex trading space, who are wedded to technical analysis as the only true approach to trading, but after many, many conversations with pro traders – those who trade for hedge funds for example – we would beg to differ.
Technical analysis is still used by fundamental investors, often as a means to time their entry or exit from a market. Using fundamental analysis, they may have decided to make a trade but are just waiting for the right opportunity to enter the market or increase an existing position. This can be especially important if you are a large trader or a fund and have the potential to move the price yourself.
Our personal view on fundamental vs technical analysis is this: give it a try and see if it works. As with so many other things with financial markets, a lot depends on what you are setting out to do. If it is forex trading, then it is likely technical analysis will be a bigger part of your tool box than if you are making one or two stock trades per month.