The technical and fundamental analysis introduces the two major approaches or even schools. They are both primarily focused on analyzing the financial market though in a different way taking into consideration different trading tools and other crucial factors.
Today, we will learn how the two approaches are different and if it is possible for them to coexist. We will also discuss the main tools that make technical and fundamental analysis different from each other.
The technical analysis is more focused on the real-time price movement and using specific indicators in an attempt to predict when the price will make the next move.
The fundamental analysis considers using a range of economic and financial factors that can influence the market or business in one way or another.
Now, let’s have a closer look at major fundamental vs technical analysis issues that define the main difference between the two major trading approaches.
Mostly, technical traders rely on charts. So, it is very important to know how to read them. On the other hand, the fundamental analysis starts with deep research of the firm’s income and flow statements, balance sheets, and other data that can shed light on its performance, potential growth, and many other factors.
Technical traders ignore this information, as they believe the company’s financial statements do not influence the stock market or asset price within the short timeframe. Their main mission is to define the direction of the price/trend movement.
Timeframes applied to each of the approaches are also different. As a rule, fundamental traders rely more on longer-term investment options, while technical traders prefer short-term strategies. If you prefer technical analysis, you would rather use charts and patterns that help to track the price within a daily, weekly, or monthly period.
If you are more fundamentally focused, you need to be prepared to wait for months or years to eventually see the issuing firm's intrinsic value. What’s more, long-term investors believe it is impossible to identify the accurate stock price in the short term. They say the security is mispriced if not tracked for long enough. Furthermore, they believe the asset price will correlate and correct itself in the long run. When we say “a long run”, we mean years.
Another key difference between technical and fundamental analysis is the time needed to generate specific data. Technical traders can plot charts and see the price movements every minute. Fundamentally-focused investors need to wait for months until the required analytic data is generated and reflected in the market.
When choosing a specific approach, one may have different goals in mind. Technically-minded people are more like full-time investors who complete dozens or hundreds of trades on a daily basis through short and medium-term orders. Fundamental investors are more focused on steady and passive income, as they do not need to deal with charts and indicators throughout the day. It helps them combine their daily duties and routine with investing.
Technical and fundamental analysis are usually applied as opposing approaches. The majority of investors do not even realize they can coexist. At the same time, proven experts have the practical knowledge on how to combine technical and fundamental analysis to recognize a stock that is undervalued (fundamental analysis) and identify the best market entry/exit point (technical analysis). A good idea to use such a blend in case of a security that is extremely oversold.
Technical and fundamental analysis are the two different approaches that introduce different schools and ways of trading. Technical traders prefer shorter terms with market insights delivered through charts with the help of technical indicators. Fundamentally-minded investors are looking for longer-term investing opportunities and focus on crucial company indicators delivered through financial statements. Despite all differences, it is still possible to combine them to support trades and find underpriced assets.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.