Fundamental vs. Technical Analysis

For many years the debate has raged between the fundamentalists and the technicians. The question is who has a winning edge in predicting market movements and trading opportunities.

Once you delve into the details of both types of analysis, you realize that they are complementary and completely different. Often it is said that fundamental analysis is for the long-term investor and technical analysis is the tool of the short-term trader, and this is a convenient if simplistic way to think about them.

Fundamental analysis for a stock is based on company performance and financials, and includes performing calculations in relation to earnings and company equity to see whether the stock will increase in value over time. The stock value should reflect the earnings capacity, profits, and dividends that will be achieved, and fundamental trading assumes that the stock value will gravitate towards its true level based on fundamental values and reasoning.

Considered in this light, fundamental analysis has little to say about how soon a stock may increase in value as that would depend on the rest of the market and other investors becoming aware of the same facts and calculations as the investor. The stock may go up next week, or it may take a year before other investors realize the value, having witnessed some increasing dividends or other indicators.

All this is of little concern to the short-term trader, who does not intend to wait for a year before he sees any profit. If you take a trading course, you will find that the emphasis is on technical analysis, which studies recent and actual price movements and other markets data. While paying some respect to the fundamentals, in that the trader does not want to buy something which may be realized by the market to be worthless next week, the trader must concern himself with market sentiment, which is best understood by analyzing the day to day, and sometimes hour-to-hour, fluctuations in the buying and selling of the financial security.

To profit from the market sentiment, the trader develops a trading strategy. This can involve price patterns over time as well as technical indicators, which are values calculated from historic data with the intention of identifying future price movements. No system has been developed that can predict with certainty where the prices will go, but the best trading courses allow you to bias the odds in your favor, to the extent that some traders can make an excellent living from playing the markets.

All markets are subject to the same basic principles, as they all, at the root, depend on human psychology. It is easy to understand the application of fundamental analysis to the shares of a company, but it may be more difficult to apply to another country for foreign exchange matters. Technical analysis, as it is based on price movement, is not limited to stocks, and trading Forex using technical analysis is the basic way to making a profit from the Forex market.