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Which is more effective: technical analysis or fundamental analysis?

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This is perhaps one of the most frequently asked questions - Which one is more effective technical analysis or fundamental analysis. The answers to this question are various as well. Some claim one is better than the other, some say it is the best if you combine them, and some even point out that none of them really works. Here as well answers are different and it can be confusing especially for beginner traders and investors to find out how they should approach these analyses.

Why are opinions so different from each other?

When it comes to trading and investments something that works for one person might not work for others. Every person has one goal when investing money or trading - to create more wealth for themselves. However, this is the only objective that is the same for all the participants of financial markets. Even this goal can be different, for someone the goal can be to have an additional 1000 USD per month, while some want to get millions. 

Which is more effective: technical analysis or fundamental analysis?

Some people have long term goals, while some are having short term plans. Set aside that people are using different strategies, have different levels of experience and knowledge. Therefore if someone uses one analysis successfully does not mean that using it will bring success to you too. The main idea is to use something that works for you based on your knowledge, experience, trading style, investment strategy etc. Hence, you need to understand the purpose of the technical and fundamental analysis, how and when to use each of them and in what cases. After acknowledging it, you will be able to decide which one is best for you to use.

Technical analysis

Technical analysis, in general, is the process of evaluating stocks or securities based on the statistics. To say simply, technical analysis is created based on the data including stock prices, the volume of trades, historical returns and etc. After analyzing these data analysts are creating a chart that shows the pattern of the certain stock's movement on the market.

Which is more effective: technical analysis or fundamental analysis?

The purpose of the technical analysis is to show the past performance and provide insights into the future movements based on the repetitive patterns. However, when we talk about the technical data, we do not mean data accumulated from the past several years. The data used for technical analysis is more from the short term periods of time.

Which is more effective: technical analysis or fundamental analysis?

There are four main categories of technical analysis: volatility indicators, momentum indicators, trend indicators, and resistant and support indicators. The idea of how technical analysis works is very simple.

Analysts are given the data mentioned above and they need to make assumptions based on three main beliefs.

  • History is repeating itself. If the stock prices have changed in a certain way under the specific conditions, they will make the same movement once the same conditions appear in the future.
  • Prices move in trends. This is a belief that the price of something that is valuable will go up or down and there are no sideways.
  • Supply-demand rule. If the prices are high, it means that there is a high demand for the goods compared to the supply. And on the other hand, when the prices are low, it means that supply is far greater than the demand.

Based on the data used for the technical analysis, the way it is created and the way it works, technical analysis is for the investors who make decisions based on the same beliefs. To say simply, who believe that price movements follow a certain pattern that can be observed based on the short term data insights.

Which is more effective: technical analysis or fundamental analysis?

Many investors look at technical analysis as a great tool for risk management. Since the data is relatively new from the past short period, one can observe it and manage risk since technical analysis allows investors to make decisions based on assumption until the prices change. It is also important to consider that technical analysis is used for the short term decisions and not for the long term investments.

Fundamental Analysis

Fundamental analysis, on the other hand, is used by investors who are making long-term investment decisions. Fundamental analysis is a method of evaluation stocks by measuring the value of a stock. In order to create fundamental analysis analysts are studying everything possible about the overall economy, the conditions of the industry the company operates in, the financial situation in the company, the management of it.

Which is more effective: technical analysis or fundamental analysis?

The fundamental analysis also includes the tangible and intangible assets of the company such as land, equipment and real estate owned by the company, as well as patents, branding, trademarks and other parts of the intellectual property. Generally, liabilities, assets, expenses, and earnings are very important parts of the fundamental analysis.

Which is more effective: technical analysis or fundamental analysis?

Since the fundamental analysis consists of many different parts that are not necessarily presented with numbers, it does not come as a chart but comes in statements that paint the full picture of the overall economy, industry, company, and securities. Fundamental analysis also determines the real value of the stocks and points out if it is worth to buy certain long term investment because it is undervalued, or if one should sell it because the price of it is overvalued.

As mentioned, fundamental analysis is used by the investors who want to make a long-term investment and need to evaluate an individual stock, a company, industry or the whole market in order to make a profitable decision. The fundamental analysis makes it possible for such investors to know the specific conditions of the industry and review economic factors.

Combining fundamental and technical analysis

Many investors are using both technical analysis and fundamental analysis to get the best from both of them and be more profitable. However, still, fundamental analysis is used for making decisions for long term investments, while the technical analysis is used for risk management mostly. Using both of the analyses have its advantages and disadvantages that you must consider before you start using them.#OPINIONLEADER# #technicalanalysis# #fundamentalsanalysis#

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