How Fundamental Analysis Differs From Technical Analysis

Fundamental analysis evaluates the intrinsic value of a security by looking at company information and economic factors. Technical analysis looks at the price movement of an asset using charts and trading tools.

As a trader, how do you go about your trading journey? Do you rely on trading tools and charts to make decisions, or would you rather look at information about the company you’re investing in and the economic factors that could affect it?

Whether you’re a new or a seasoned trader, it’s pretty much a given that you will encounter fundamental analysis and technical analysis at one point or another in your trading journey.

In some instances, you might even hear the term trading psychology being thrown around. So what are they, and why are they important in trading?

Fundamental Analysis vs Technical Analysis

Fundamental analysis is a trading strategy that examines all factors that have an impact on a business, aka the fundamentals.

This can include everything from revenues, valuations, income statements, balance sheets, economic events, to industry trends.

This strategy analyses the intrinsic value of a company to determine whether a stock is underpriced or over-priced, which can be a basis on whether or not you should be adding the stock to your portfolio.

On the other hand, technical analysis uses charts and trading tools to look at the price movement of an asset and its historical data in an attempt to predict future price movements.

As a trader, you can use one or the other depending on your preference and other factors such as the timeframe you want for your investment, your trading style, etc., but you can also use both fundamental and technical analysis together.

In fact, one study even pointed out that adding technical analysis can outperform other trading strategies.

Side-by-Side Comparison

Fundamental Analysis Explained

Fundamental analysis is a strategic method that evaluates the intrinsic value of a security, such as stocks, forex , or even cryptocurrencies , by looking at company-specific information, as well as economic and industry factors.

A company’s intrinsic value, also known as its book value, is the sum of all the company’s assets minus its liabilities. This differs from its market value, which is the current price that the company’s stock is selling for in the market.

By using fundamental analysis, a trader looks at everything that can impact the asset’s value, including macroeconomic factors such as the state of the economy, industry conditions, and political situations, to microeconomic factors like company-specific information and effectiveness of the company’s management.

Traders who use fundamental analysis are typically long-term investors who rely on resources like financial statements, industry trends, economic reports, and market releases to calculate the intrinsic or “real” value of an asset.

This strategy helps traders determine if the shares for a certain company are overvalued or undervalued and use this data to decide if they should invest in it now or wait for a better price in the future.

Technical Analysis Defined

Technical analysis is a strategy that aims to analyze and forecast the price movement of a stock by using charts and other trading tools to look at its historical data, such as previous price trends and volume.

This strategy relies on the economics of supply and demand forces that interact in the marketplace. As a technical analysis trader, you look at how a stock performed in the past to predict how the price will change in the future.

For this reason, technical analysis looks at short-term price fluctuations and is often used by scalpers and day traders. Among the main factors that technical traders make use of are charts, moving averages, indicators, and oscillators.

While both fundamental and technical analysis are equally important, it’s also imperative to remember that trading psychology also plays a role beyond the fundamental and the technical aspect of trading.

What Is Trading Psychology

Trading psychology encompasses both the trader and the market and looks at the various aspects of a trader’s character that influence his or her trading decisions. Its goal is to help traders understand the two main emotions that drive their behavior - fear and greed - and keep these under control.

While fundamental and technical analysis can help anyone make the most out of their trades or investments, it is through trading psychology that they will get to know themselves better as a trader.

Are you primarily driven by emotions when you trade? Do you make snap decisions when it comes to your investments? Do you abandon your trading plan when you feel like you can book profits?

With trading psychology, you get to be more self-aware about your trading styles and preferences, which is a very significant factor to consider when coming up with your own trading strategy and plan.

In technical analysis, for example, charting techniques can help you spot trends for buying and selling opportunities and provide insights on how a stock is performing. However, you need to rely on trading psychology in order to have that understanding and intuition for market movements.

As such, it doesn’t come as a surprise that effective traders who use either fundamental or technical analysis (or both) are those with balanced trading psychology because the more you know yourself as a trader, the more you can make your strategies work for you.

Conclusion

Before you decide on whether fundamental analysis or technical analysis is for you, evaluate yourself first as a trader. Look at trading psychology from your own perspective and understand what motivates you to put your money into securities in the first place.

What are your goals? How long do you want to wait? What’s your risk appetite? These are questions that you need to figure out to make better trading decisions using your preferred trading strategy.