Fundamental vs Technical Analysis: #9 differences that matter

///Fundamental vs Technical Analysis: #9 differences that matter

For starters, there are two types of analysis- fundamental and technical analysis. The former calls the later as pseudoscience or voodoo science, while the latter shrugs it off saying ‘as long as I’m in profit, what matters’. But, for a new trader, a question always lingers in mind, which side he/she should opt in- Fundamental vs Technical Analysis.

Let us have a brief glimpse of what is what, first.

Fundamental Analysis

It is the study of accounting books of a company, its stakeholders, and the management’s competency to deliver profits, in the case of stocks.

In forex, it turns into the study the economic well being of the country. And for that sake, one has to forecast the gross domestic product, interest rate and inflation-related indices like CPI, WPI.

Furthermore, whether it be stocks or forex, one has to keep an eye on the political situation of the country, as well.

Because, when a government stumbles, traders fumble their assets and as a result, the market tumbles. Hence, the greatest ally to a President is always investing community, who expect him to complete his tenure, no matter what he is.

Technical Analysis

A technical analyst is one who presumes studying the accounts book or the country’s well being is a waste of time. He leaves this hard work to fundamental analysts.

Instead, he uses the charts to define supply and demand for a particular asset.

There are chart patterns, price action and indicators, say RSI, Bollinger Bands, through which a technical analyst interprets the mass psychology.

Technical analysis is not about prudent investment. Instead, it is just about ‘going with the herd.’ Get to have a more detailed view of technical analysis here.

So, now the debate – Fundamental vs Technical Analysis.

Fundamental vs Technical Analysis – Round #1

Long-Term Investment

Fundamental Analysis vs Technical Analysis long term investment

An investment is something you make now, on the hope to reap its benefits decades later.

Fundamental analysis has its foundation built on the profits and sales(in stocks), GDP and economy (in the case of forex).

Though they can deviate from the projections, it doesn’t happen overnight. But the schematics of demand and supply can vary from day today.

A product has a life-cycle and the market is cyclical too. These long-term cycles are forecasted with Elliott waves in Technical Analysis.

However, Elliott wave is an excellent post-analytical tool rather than a pre-analytical tool, according to many technical experts.

So, when it comes to long-term investment, Fundamental analysis has the upper hand.

Fundamental vs Technical Analysis – Round #2

Short-term Trading

Fundamental Analysis vs Technical Analysis short term trading

Short-term price fluctuations entirely rely on the demand and supply of the market.

The support and resistance concepts of Technical Analysis, play a more significant role even in fundamental analyst’s bargain hunting.

Every trader out there wants to squeeze every pip or penny from the market.

For short-term trading, Technical analysis is the only choice available at a trader’s disposal.

Round #3: Time vs. Return

Time vs. return

This is a crucial aspect for investors/traders.

Fundamental analysis is always on the slower side. Even a sound fundamental stock, takes time to reflect it in its price.

Whereas, technical analysis can produce returns on a quicker time frame.

Though the fundamental analysis is slower, it gets you the first-row ticket to massive rallies. When markets were off to flyers, a fundamental analyst sits and enjoys his trade.

A technical analyst always enters into a trade and exits early too due to overbought and oversold indications.

So, for quicker returns, one has to opt for technical analysis, but for higher yields, one has to sign up for fundamental analysis.

Fundamental vs. Technical Analysis – Round #4

At all-time highs and lows

Fundamental Analysis vs Technical Analysis at all time high and low

The fundamental analysis defines the intrinsic value of an asset. If the asset is below its intrinsic value, an analyst goes long, hoping it to rise to its inherent value.

Likewise, if it is above the intrinsic value, one expects it to correct to its intrinsic value.

It doesn’t matter whether it is at its all-time high or low.

However, for a technical analyst, trading all-time highs is like fighting a duel with his hands tied.

With the absence of support and resistance, a technical analyst merely hopes the trend to continue or the overbought/oversold trade setups to activate.

Hence, at the all-time highs and lows, a fundamental analyst has the edge over technical analysis.

Fundamental vs Technical Analysis – Round #5

What if your analysis is wrong?

what if analysis is wrong

The fundamental analysis assumes your analysis is right. It encourages resilience, although it is essential for trading pro, it has the potential to wipe out one’s account when things go awry.

The technical analysis defines a suitable stop loss value. And it lets you afloat, even after multiple failures.

The main reason traders use technical analysis is that of its application of risk-management methodologies.

It’s all about your preference – one-way exit (intrinsic value) or two-way exit (Target & stop-loss).

Round # 6: Cooked up books vs. Fakeout

cooked up books vs. fake out

Statisticians often say numbers don’t lie, but if they delve into the numbers of some listed companies, they might have second thoughts.

Fundamental analyst cry of solid fundamental stock, but it remains doldrum for years. The reason is pure and simple- cooked up books.

Although, no analyst talks about out it in the open. It prevails and the obsession over numbers can easily mislead an investor to an ambush.

Likewise, technical analysis isn’t fool-proof, either, it has its share of fallacies in the form of fake-outs.

In stocks, fakeouts outnumber breakouts at least twice in occurrence. And in forex, fakeout is a common phenomenon too.

Both have their share of flaws in this aspect, but experience can and will nullify it.

Fundamental vs Technical Analysis – Round #7

Automated Trading Systems

automated trading systems

Stock and forex trading was once a restricted area, exclusive to accountants and economists, respectively.

The advancements in technology and technical analysis has paved the way for the techies to enter into trading.

If you’re a programmer and if you know the basics of technical analysis and algorithmic trading, you can code your logic and make money, day in day out, without breaking a sweat.

For a forex trader, it gets even more comfortable, tailor-made Automated trading systems are available in the market.

Though fundamental concepts are automated to evaluate stocks by institutions, it isn’t feasible for a retail investor to get access to such sophisticated softwares.

If automation is your arbitrary criteria of evaluation, then the technical analysis is a no-brainer.

Round #8: CFA vs. CMT

Fundamental Analysis vs Technical Analysis CFA CMT

If you are looking for the validity of the technical analysis, it has a professional course to substantiate it, Chartered Market Technician. The Market Technicians Association (MTA) awards the degree.

Likewise, Chartered Financial Management (CFA), regarded as the epitome of investment banking education, comprises fundamental analysis.

Fundamental vs Technical Analysis – Round #9

Efficient Market Hypothesis

Fundamental Analysis vs Technical Analysis efficient market hypothesis

The theory, enunciated by Eugene Fama in 1979, states that a market reflects all the news in its price i,e. the market is priced to perfection.

Hence, price movements are not predictable instead they are random. It sets off both value investing and technical analysis.

Although it bagged the Nobel Memorial Prize in Economic Sciences in 2013, both fundamental and technical fraternity disregard it. While many accommodate the efficient market hypothesis within their analysis- they try to enter the market before it prices in a news or neglect the news if it is already priced.

The Combo: Techno-Funda Analysis

While we’re busy debating the Technical Analysis vs. Fundamental analysis battle,  there is a new segment of investors who combine the both in their decision making. They analyze the intrinsic value of the asset and use technical concepts like support and resistance, moving average to define their entry and exit points.

Conclusion

If you’re up to this, you would know, you’re going to read a cliched verdict. Unfortunately, it is the case with Fundamental analysis vs. Technical analysis. It is not about which is best. Instead, it is about which suits you the best. Your education, competency, area of interest and especially your expectation out of the market, define the best in the case.

2019-05-13T17:19:35+00:00