The different methods and strategies that are used to analyze assets and securities all fall under two very wide categories: fundamental and technical analysis. The fundamental approach looks at the different factors of a company when calculating its true intrinsic value. Technical analysis looks at the market in a completely different vantage point. When using it, caring for the “value” of the asset isn’t necessary as the only interest is in the price movements of the market. Traders that use this approach look at the historical data and search for patterns that occurred in the past that may forecast the future price movements.
Both methods have their own strengths and weaknesses, but after filtering through all the fancy tools and exotic parts that they use, they’re both instruments that are a vital part of investing in any financial market. We’ll take a good look at what constitutes fundamental analysis and technical analysis here. There are many debates between investors on which one is better than the other, but what matters is the understanding of both and how to use each one during the right situation.
The largest part of fundamental analysis is taking a look at the financial statements of an asset. This is known as quantitative analysis since it involves looking at the expenses, liabilities, revenue and liabilities of the asset’s company. Investors that use this method search through all of this data to gain a better insight on the asset’s future performance. Yet this is just part 1 of 2 on the fundamental analysis.
The other part is more of qualitative analysis – breaking down all the intangible parts of a company that are difficult to measure with numbers alone. This is a bit difficult for beginning investors, but experienced traders use this method to look for information that’s in between the lines. Basically, they are trying to get a “feel” of the management, how they run and whether the members of the business that are running it at the moment show potential for future growth. Instead of investing in the company, you’d essentially be investing in people that will have an effect on the asset’s price movement.
This is more different compared to fundamental analysis as it’s a bit easier to understand. Trading with technical analysis relies on chart patterns, oscillators, indicators and sometimes a combination of each other. This method includes the use of historical data and volume to determine the strength and trends of the markets. The intrinsic value of an asset is not necessary in technical analysis, as the only thing that matters is the past data and how much information it has in forecasting the future price movements.
Technical analysis and fundamental analysis are simply two sides of a coin. They have different values and factors that play a role in trading, but they are all part of the same coin. Learning about both methods is the best way to invest as you get the best of both worlds.