Technical or fundamental analysis: Which is better?

Technical and fundamental analysis are the two main pillars of your trading or investing activities and complement each other. Excluding one or the other from your toolkit can only hurt you. This is not to say that a purely technical trader working with trading systems should also conduct a thorough fundamental analysis of the asset they are trading, or that a fundamental analyst should also conduct a thorough and detailed technical analysis. But any technical analyst should know the fundamental factors that determine the price of the asset he or she is trading, and any fundamental analyst should consider some principles of technical analysis before investing.

It is also true that fundamental analysts tend to always use charts and some supporting indicators, while technical analysts often make the mistake of not being interested in the fundamental analysis of the market they are working in. A good trader will use both technical and fundamental analysis, even if he or she prefers to favor one or the other!

There are great investors like Warren Buffett or George Soros who base their fortunes on fundamental analysis, and others like Alexander Elder or Paul Rotter who specialize in more technical trading. As a general rule, investors have a greater preference for fundamental analysis because their strategies are more focused on the price of the asset, while traders specialize in technical analysis because their strategy is based on the price of the asset.

Methods of technical and fundamental analysis

Fundamental analysis focuses on studying the value of an asset and then compares it with the market price to discover a possible investment opportunity. And technical analysis focuses on studying the dynamics of an asset's price, i.e. its movement, in order to identify a possible trading opportunity.

Fundamental analysis tools

The tools used in fundamental analysis depend on the type of market or asset being traded. For example, fundamental analysis applied to stocks focuses on balance sheets, market position, industry research, and utilizes tools such as cash flow studies, accounting ratios, and other economic data.

However, fundamental analysis applied to commodities is quite different and varies by sector (energy, agricultural, or industrial commodities) as well as the commodity itself. For example, corn, which is a grain product, requires a different fundamental analysis than soybeans, which is an oilseed crop, even though both are agricultural commodities. The same is true for the fundamental analysis of currencies and stock market indices, which are more macroeconomic in nature.

Technical Analysis Tools

The tools used in technical analysis are very diverse and include both charts and technical indicators. Technical analysis is basically based on using these tools to create a system or strategy that will generate trading signals or simply alerts. These trading strategies can be manual, automated or semi-automated.

Which analysis is more difficult: fundamental or technical?

It all depends on the level of depth we want to cover in one or the other type of analysis. Both types of analysis can be simple and accessible to everyone if we study them at a basic level, or extremely complex, requiring deep knowledge in other related disciplines if we decide to specialize in them.

Fundamental analysis can be performed at a fairly basic level. It requires knowing a little about the fundamentals that drive the market and the asset we are working in. But it can also be applied at a more advanced level, using complex statistical and econometric programs that require knowledge of special programming languages such as Python or R.

The same can be said about technical analysis. At the most basic level, it is available to anyone with a little time and effort, but it can also be used at a very advanced level, using automated systems. These already require knowledge of programming languages such as C, C++, Java, etc., or even include tools that go beyond just using technical indicators. For example, quantitative or econometric studies using such Python or R.

Degree of adaptation of fundamental analysis

Fundamental analysis is very specific. This means that you cannot apply the same methodology to every market, sector or asset, and the more you specialize in this type of analysis, the more specific it becomes. In other words, fundamental analysis has a low degree of adaptability to different markets. If you specialize in fundamental analysis of stocks, this methodology will be useless for you when analyzing oil futures, for example.

Degree of adaptation of technical analysis

In terms of the degree of adaptation to different markets and assets, technical analysis has a clear advantage over fundamental analysis because it is much more versatile. Even if you use in-depth technical analysis, you can still apply it to any market and sector. The versatility of technical analysis is one of the reasons why trading has become so popular. Once the methodology is learned, it can be applied to almost any market and product, although remember that you should always use fundamental analysis applicable to the market you are trading in addition to fundamental analysis.

Conclusion about technical and fundamental analysis

Technical and fundamental analysis are very important and should be used together to achieve the best results. Since fundamental analysis requires a lot of dedication, it forces us to reduce the number of markets or assets we can trade and we will have to specialize. But this is a good thing. A professional trader always specializes in one market or sector. An inexperienced trader is someone who compulsively trades many securities without knowing them thoroughly.

FAQ

Q: What type of analysis is appropriate for training?
A: Fundamental analysis accelerates your learning and experience. We recommend that you pick a few stocks to trade and specialize in them, trying to understand the fundamentals that drive price, the deeper the better.

Q: What are some of the most common mistakes?
A: One of the most common mistakes in trading is the mania to invest in many different assets. Brokers, especially OTC brokers (Forex, CFDs) are guilty of this. They usually offer you access to any type of market and asset, with free real-time data and low commissions.