Fundamental Analysis vs Technical Analysis

In all the financial markets both the fundamental analysis and technical analysis are widely used for identifying the trading patterns and deciding the trading strategies. Proponents and opponents of both the theories are always at loggerheads about the efficacies of these methods. Whereas, for a successful trader there is never a dilemma what school of theory should be followed for the trading strategies as he has learnt the art of optimum blend of both the approaches.

This article is an endeavor to compare both the analysis.

What is this analysis?

Fundamental Analysis: It looks at the fundamental and overall economic parameters. It involves the study of macro and micro economic events. It studies the cause of market movement.
Technical Analysis: It involves the study of historical price and volume charts. It tries to identify the trading patterns. It studies the effect of price movement.

What is the time horizon served by the analysis?

Fundamental Analysis: The fundamental analysis takes a relatively long term approach to analyze the implications of social, economic and political factors.

Technical Analysis: Technical Analysis is targeted towards predicting price movement over a very short time frame of weekly, daily or hourly charts.

What are the premises on which the analysis is based upon?

Fundamental Analysis: It believes that every financial instrument has its intrinsic value. The intrinsic value is a function of various underlying variables and parameters. Fundamental analyst attempts to measure the intrinsic value by applying various models and formulae. Based on the estimated intrinsic value, the analysts then compare the intrinsic value with the current market price and then decide whether the price is overvalued or undervalued or in equilibrium.

Technical Analysis: It is formulated on the basis that history repeats itself. There is a tendency for the prices to move in trends. Market action and hence the price discounts all the fundamental attributes.

What are the factors that can affect the price movement?

Fundamental Analysis: Interest rate, GDP, trade balance, employment growth, and inflationary measures are the primary factors that can impact the valuation of currency. Geopolitical events and the speeches of central bank chairman can also greatly influence the fluctuations in Forex prices.

Technical Analysis: Technical analysis strongly defies the fundamental factors and believes that the market has discounted all the known and unknown variables in the price action. Technical analyst believes that all the relevant information is provided to him by the market generated data and it is available on his charts.

What is the goal of the analysis?

Fundamental Analysis: Goal of the fundamental analysis is essentially targeted at investment. The fruits of the fundamental analysis may be reflected in the price only after a long period of time.

Technical Analysis: It is primarily suitable for very short term traders.

Summing Up

Most of the critics of technical analysis question the credibility of price prediction based on historical price volume data and say that the technical analysis is nothing but a black magic. Well known fundamental analysts who have remained the opponents of the technical analysis include the most respected names like peter Lynch and Warren Buffet.

Critics also often argue that the combination of both the analysis is counterproductive as both the approaches are contrasting to each other. However, a large number of traders have successfully merged both the approaches to suit their individual trading styles and decisions.

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