When looking to invest or become involved in the financial world, a thorough analysis of the move and flow of the market usually goes a long way in assuaging plaguing doubts. Naturally, picking out the right technique to analyse the situation of the market in due time is sometimes not exactly easy.
Now, be it computing a fundamental or a technical analysis, one is sure to come in handy when the need arises. However, they are both different school of thoughts.
A simple way of looking at a technical analysis would mean you would have to hone your power of predictions by taking a sweep at the previous market charts and past market predictions. Fundamental analysis could be basically described as employing mathematical methods in analysing how various economic and financial factors could influence the flow of the market.
While they both give an idea of the current and future state of the market, their differences become magnified over time. A detailed look into how each works should however tell us how they can be used together to achieve a common aim. Let’s go through them together.
Technical Analysis Vs Fundamental Analysis
Data Collection and Tools of Trade
A typical technical analysis begins the first approach with a survey of the market charts and stock prices of companies. Fundamental analysis, however, takes its first step with a more quantitative analysis of all existing financial statements. This method expands into looking through revenues, expenditures, assets, liabilities and all modes of cash flows and financial aspect of the company under scrutiny.
Technical analysts basically rely on all information and data collected via thorough review of market charts. They monitor these charts for all relevant price movements and narrow it down to the nearest zeroes within particular time frames. The charts and stock prices, according to the analysts, reveal all they need to know about the fundamentals of the company.
A swing at a simpler angle could be seen as when trying to analyse a person’s character via their appearance and comparing with their previous way of appearance and demeanour. The proportionality between the present and the past should be able to draft the behaviour that person.
Most technical analysts look through things this way. Technical analysis gives comprehensive trading models and rules which, according to Diffen, is based on the price and volume transformations. Some of these transformations include inter-market and intra-market price correlations, the patterns of the charts and stock market cycles. These tools basically showcase the variation in price movements and trends while giving the analysts a ground for future predictions.
Fundamental Analysis, on the other hand, entails lots of paperwork and mathematical reviews. Fundamental analysts simply think, talk and view balance sheets, income statements and any other relevant financial records that would influence their conclusion.
This, of course, entails more than crunching numbers. This mode of analysis basically predicts future price movements by taking a deeper look at the fundamentals of the business or company.
Taking a look at the simple analogy made about predicting a person’s future character. A fundamental analyst would not just take in the appearance and predict the person’s next move. The analyst would look deeply into what influences his behavioural attitudes at each point. He would pick out little movements and piece each together over time to discover what action would breed certain reactions.
Fundamental analysis, on this note, looks at a long line of investment decisions made over time, take in the values at each point in time and look for a basis for each factor that must have influenced the choices and values of investment. This analysis, then, bases the company’s intrinsic value on these calculations while creating an appropriate business model.
One of the primary factors that defines and sets each school of thought apart is their time usage. Looking at the approach taken by each analysis, it is safe to conclude that a technical analysis will take a shorter term approach when compared to the fundamental analysis.
This theory revolves round the fact that the analysis of the market with a technical approach would assume a timeframe of weeks or days or seconds. Technical analysts are mostly traders with the basic aim of selecting a stock or asset(s) that can be valued at a higher price in the short run. This works basically because they just have to look backwards to pick out relevant trends.
Fundamental analysis involves a longer time of analysis. This is basically because analysing the market means considering changes in data and financial statements that reflect the current state and future value. Fundamental analysts sometimes have to rely on quarterly financial statements which, of course, cannot be cumulated as fast as trading volumes appear.
Notably, a recognised tool of trade for fundamental analysts is investment. Getting to know where you’d put your money and time in, will mean you’d need time to go over every details you can get right? Thus, the time frame for fundamental analysis is quite long.
Chances of Co-existence
While these two methods of analyses are as different as day and night especially when applied to the valuation of securities, many investors and traders that had tried combining them had recorded success.
Their major rivalry mostly stems from the fact that value investors that belong to the fundamental school of thought would often assume that a security is being over-priced or mispriced over the short-term. Thus, they would conclude that the price will correct itself over long-run.
While these assertions are sometimes correct, investors have been known to lean towards both methods of analyses for better results. For example, a trader hoping to benefit from a breakout near an earnings report would look to the fundamental analyst for a review of the stock’s potentials.
Similarly, an investor, after identifying a significantly under-priced asset or security will look to a technical analyst to find the right entry and exit point before investing to avoid costly mistakes.
Though a combination of these two analyses sometimes looks good and is certainly beneficial, the idea is mostly not widely received by the uncompromising parties of each school of thoughts.