Know The Basics: Fundamental vs. Technical Analysis For Making Investment or Trading Decisions

Investing and trading are often used interchangeably, but they are essentially two distinct concepts even though they both mean merely to “make money” from a financial market. They are both used to analyze securities and make decisions with the goal to turn a profit; however the timeline is different. The focus of investing is about future prospects, the potential for growth and long-term overall gains. It is all about gradually and continuously building wealth over a long period of time through buying and mainly holding securities. Trading, on the other hand, focuses on the short-term returns, the market’s technical aspects (rather than a company’s long-term prospects or market fundamentals) and involves frequent buying and selling strategies. It can be described with the short strategy “Buy to sell”, whereas the strategy of investors usually is “Buy to hold.”

Simply put, traders are more interested in price and investors are interested in (intrinsic) value. Also, trading entails higher risk but might develop higher returns than investing. When it comes to time commitment trading is more time-consuming and active on a daily basis.

So, being two different subjects, investing and trading also require different perspectives and approaches. Consequently, there are two general methodologies of analyzing securities and making investment or trading decisions, called Fundamental and Technical analysis. All in all, traders rely upon technical analysis tools to analyze price movements and generate quick returns, while investors use fundamental analysis and a market’s underlying factors to evaluate an asset, its intrinsic value and future potential, and to achieve long-term gains. Still, practically most financial market participants use a combination of the two types of analysis seeking maximum results. In this post, you can find the basics of both methodologies which can help you decide which one is right for you.

Technical Analysis boils down to the analysis of supply and demand in a market to determine the direction of the price trend. It is the method of examining price movements and statistical trends by observing current and past market data, trading activity, predominantly price, and volume. Technical Analysis entails patterns and rules based on price and volume transformations, such as such as the relative strength index, moving averages, regressions, price action, etc. A fundamental principle of technical analysis is that a market’s price reflects all relevant information influencing that market. That includes the idea that past trading activity and price changes can be useful to predict future price movements and those patterns can be used as a basis or trading decisions.

Fundamental analysis is a process used to evaluate a security in terms of its intrinsic value and value growth potential. It is performed with the goal of predicting future market trends and value rates to make investment decisions and thus, make a profit. Fundamental analysis studies various aspects that might affect the value, supply, and demand of an asset. The fundamental analysis includes research on economic, industry and company level and so the method encompasses macroeconomic and microeconomic factors which can be affecting the value of an asset. Consequently, it takes into consideration the overall condition of the economy and other factors including interest rates, production, employment, GDP, housing, manufacturing. And it also involves checking a company’s financial features such as earnings, sales, profits, expenses, assets, liabilities in order to gain insight into the company’s future potential and performance. The analysis is performed on current and historical data but with the objective to make financial forecasts.

Every person has a different mindset has their own approach towards the financial and currency markets. When it comes to cryptocurrencies, short-term trading is more suitable, as the characteristics of the market and mostly its volatility and high risk, make it hard to plan long-term investment strategies and assess fundamental factors properly. Technical analysis can be easier, faster and more accessible to use because of all the software and algorithms out there, which make the calculations (For more information on TA tools and indicators, check our previous article). Still, knowledge in fundamental analysis basics can be significantly useful.  If you are not sure which one will best work for you, you should keep in mind that understanding the difference will help you resolve between the two methods. Also using a combination of both techniques can increase the possibility of making wiser decisions. As it is not always black or white, trading and investing are not exclusive. Learning to use elements from both disciplines depending on the situation will make you much more flexible.

In any case, before you undertake any actions, it is a good idea to ask yourself the following questions:

–    What are your goals – short-term, quick wins or long-term growth and steady returns?

–    How much time do you have to spend?

–    How much risk are you comfortable with?

–    How do you make decisions? Are you impulsive and spontaneous or cautions and patient?