Technical vs Fundamental Analysis
Both technical and fundamental analysis aim to tell the trader where the market is going. Both types of analysis are used across stock, futures, forex and options trading. This article explains what each type of analysis is, discusses the difference between technical and fundamental analysis, and tells you which you should concentrate on if you are a trader.
Technical analysis is based around the use of charts and analysis of price data to pick turning points, predict future prices or provide indicators that will help the trader to make a decision. Technical analysis is very much based on price data. A technician may use a computer program to smooth price data and determine that the price has changed trend, then buy a futures contract.
Fundamental analysis involves looking at a company’s balance sheet, comparing financial ratios, understanding underlying market trends and external factors. For example, a fundamentalist may notice that a company has a new product in the pipeline, compare it to other offerings, and decide that the company is a buy.
In practice, the shorter your trading term, the more you will rely on technical analysis. If your holding period is 10 minutes (this may be the case for some forex or futures traders), fundamental analysis based on data that changes every few months is not going to help you. You will need to be able to analyse price movements instead. If your trading is longer term, you will use more fundamental analysis, but technical analysis can still help you.
Overall, our recommendation is that if you are a trader, you will need to develop a usable technical analysis approach. We will discuss this more in future postings.
