What are the main differences between fundamental analysis and technical analysis?

9 Feb 2024

In this article, I wanted to share with you some differences between technical and fundamental analysis, I hope it will be useful.
Key differences between technical analysis and fundamental analysis: 1. **Definition:** - **Fundamental Analysis:**
Fundamental analysis uses macroeconomic factors, industry trends, company financials and other fundamental indicators to determine the true value of an asset. - **Technical Analysis:** Technical analysis attempts to predict future price movements by examining price movements and based on historical data.
2. **Data Sources:** - **
Fundamental Analysis:** Fundamental analysis is generally based on macroeconomic data such as companies' financial reports, economic indicators, industry reports and similar. - **Technical Analysis:** Technical analysis is based on market data such as price chart data, volume data, indicators and mathematical analysis.
3. **Focus Factors:** - **
Fundamental Analysis:** Fundamental analysis considers factors such as the company's health, profitability, growth potential, competitive advantage and general economic conditions. - **Technical Analysis:** Technical analysis examines price movements and volume, evaluates trends, support and resistance levels, formations and indicators.
4. **Time Frame:** - **
Fundamental Analysis:** Fundamental analysis is often used by long-term investors and those who study fundamental values. It focuses on predicting the long-term performance of the company or economy. - **Technical Analysis:** Technical analysis is more commonly used among short and medium term investors. It focuses on identifying short-term price movements and trading opportunities.
5. **Methods:** - **
Fundamental Analysis:** Fundamental analysis generally uses methods such as financial ratios, discounted cash flow (DCF) analysis, market multiples to determine the true value of the company. - **Technical Analysis:** Technical analysis uses technical indicators and formations such as price chart models, trend lines, moving averages, RSI, MACD.
6. **Investor Profile:** - **
Fundamental Analysis:** Fundamental analysis is more common for value investors and long-term investors. It focuses on the company's core values and long-term potential. - **Technical Analysis:** Technical analysis is more suitable for short-term investors, intraday traders, and those using strategies based on technical analysis. It focuses on capturing short-term price movements and supporting trading decisions. These differences between fundamental analysis and technical analysis can help investors decide which analysis method to use based on their preferences and investment strategies. Some investors may choose to use both methods together, while others prefer to use only one.
7. **Risk and Return Approach:**
   - **Fundamental Analysis:** Fundamental analysis evaluates the relationship between risk and return when trying to determine the true value of an asset. It takes into account the risks and potential returns of the investment, as well as factors such as the company's health, growth potential and competitive advantage.
   - **Technical Analysis:** While technical analysis produces trading signals by examining price movements, it evaluates the balance between risk and return mostly through technical indicators and analysis tools. Factors such as the strength of trends, market fluctuations, and the current state of the price help determine buying or selling decisions.

8. **Reaction to News and Events:**
   - **Fundamental Analysis:** Fundamental analysis focuses on fundamental factors such as companies' financial performance, industry news, economic data and other important events. Such news and events can affect the fundamental value of an asset and change investors' strategies.
   - **Technical Analysis:** While technical analysis examines price movements and volume, it generally focuses less on such news and events. Instead, it analyzes how the market reacts to these news and events, their impact on the price chart, and how trends change.

9. **Amount of Data Used:**
   - **Fundamental Analysis:** Fundamental analysis attempts to determine the value of an asset, usually by examining large amounts of data and information. It uses a wide range of data such as company financial statements, reports, industry analyzes and economic indicators.
   - **Technical Analysis:** Technical analysis focuses more on market data and price chart data while examining price movements and volume. Tools such as technical indicators and chart patterns are used to analyze this data and generate trading signals.

10. **Application Areas:**
   - **Fundamental Analysis:** Fundamental analysis is often used on long-term investment instruments such as stocks, bonds, commodities and other traditional assets. It is often preferred to determine the value of a company and to invest.
   - **Technical Analysis:** Technical analysis is generally more commonly used in stocks, forex, cryptocurrency and other short-term trading instruments. It is often used to predict short-term price movements and identify trading opportunities.

These differences are the main distinctions between fundamental analysis and technical analysis. Both methods can be important analysis tools for investors and can provide useful results when used in the right conditions. Investors may consider these differences when determining which method to use, depending on their investment strategies and preferences.

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