Difference between Fundamental and Technical Analysis

While analyzing price movement, forex trade uses two primary types of analysis. Those concentrating on price movement and neglect other factors choose to guide their efforts at enhancing their skills at technical analysis, whereas traders preferring to examine the economic events which cause the market action mainly throw light on their efforts in analyzing fundamental analysis.

Most traders wish to mix the information supplied by these two kinds of analysis in order to generate accurate trading signals. Others focus on one aspect of analysis and discard the other type from the computations, and yet it can be said that either of the approaches can be valid with respect to the circumstances. In essence, there are traders who have been acquiring reputation as well as wealth by trading effectively based on fundamental analysis. But as both of these people disagree in several subjects, they would most probably agree with the fact that discipline and emotional control are said to be the most significant aspects of a productive trading career, even prior to analytical prowess.

The technical analysts may view his charts, detect the extreme values assigned with the indicators, and may alert against following a trend that is in danger of being suffered from a sharp reversal as the unavoidable counter-trend action takes place. On the other hand, the fundamental analyst will see the euphoria in analyst community as well as news sources, take into account the various declarations of government agencies and personages, and will broadcast the same warning message. As the instruments and indicators employed by these two types of individuals vary, their actions typically coincide with each other.

Technical and fundamental analysis is not exactly the same; the predictive strength of the fundamental studies is substantially greater, at least in the long run. However, these two types of analysis are closely related to two different languages used to describe the same phenomenon, and they present the same direction and come at the same conclusion, at least on the hindsight.

Simply put, technical analysts perform their investments or trades based solely on the volume and price actions of securities. By using charts and several other tools, they trade on momentum, irrespective of the fundamentals. Although it is quite possible to use both the analysis methods in combination, yet one of the basic notions of technical analysis is that, as mentioned previously, the market discounts every entity. Similarly, all news regarding a firm is already prices into a stock, and hence, price actions of a stock can provide more insight relative to the underlying fundamental elements of the overall business itself.

However, followers of the effective market hypothesis commonly disagree with both technical and fundamental analysis. In this context, the efficient market hypothesis argues that it is basically impossible to generate market-beating returns for the longer term, by using either technical or fundamental analysis. In essence, the principle for this debate is that, as the market effectively prices all stocks about an ongoing basis, any valid opportunities for excess returns gained from technical or fundamental analysis would be immediately reduced by the market’s players, thereby making it impossible for any trader to meaningfully outdo the market on a long term.

Functionally, both the analysis techniques are used for selecting investments whose prices are will move in a productive and profitable direction for the trader/ investor; ‘up’ for traders who want to buy an investment and ‘down’ for traders who want to sell or reduce and investment. Fundamental analysis allows the investor to find an investment which is mispriced within the market in comparison to its real value as identified by the investor’s analysis. Technical analysis allows the investor to identify investments whose patterns match patterns that were previously seen, and will result in the price of investment moving in the required direction when followed.

Lastly, fundamental analysis sees the market as a rational sector. It also assumes that a security’s price eventually reflects the true value of the investment. Contrarily, technical analysis sees the marketplace as a repetition of itself and its past trends, and a security’s price eventually moves in a similar way as other investment prices move.