Technical Analysis vs Fundamental Analysis

The never-ending debate- Which is best? Technical Analysis vs Fundamental Analysis. Whenever this argument is made in forums or blogs, it is based on the premise of stock markets. Let’s compare the fundamental analysis and technical analysis of all the three segments-stocks, commodity and forex.

Fundamental Analysis

The fundamentals of the three markets vary a lot. One is about the balance sheet and revenue, the other is about demand and supply and another is about the nation’s economy. So instead of generalizing it, we will assess it as separate notions.

Fundamental Analysis of Stock Market

It involves analyzing the balance sheet of an entity to assess its economic well being. Analysts create financial models to forecast the future revenue growth and discount it to present value. A retail trader can easily project incomes of companies if he has good accounting and finance background. Fancy tools are not required to forecast the stock price.

Though it is a tedious process, it can be done by a retail investor. All the required financial data are readily available on the company’s website.

Fundamental Analysis of Commodity Market

Fundamentals of commodity market involve studying the demand and supply for a commodity to ascertain its fair value. If supply deficit or surplus demand is forecasted for the future, then the price of commodity increases. If the inverse is forecasted it decreases the price of a commodity.

The process of forecasting is time-consuming and figures are also not static. But, high-end Newsfeed tools, can make it theoretically possible for a sophisticated retail investor. 

Fundamental Analysis of Forex Market

Saved the best for the last. A fundamental investor should forecast a country’s GDP, CPI, PPI,  inflation rate, fiscal policies by the government, monetary policies by the central bank, employment data, import and export and other mumbo jumbos. Safe to say, he has to assume the role of finance secretary and central bank governor. Sounds fascinating!! Isn’t it? It doesn’t stop here, when a new turmoil like trade war or political instability surfaces, he has to punch in extra hours. (Get our free newsfeed indicator which delivers live economic data at the MT4/MT5 terminal)

Don’t be overwhelmed just now. All the three markets are correlated. The fundamental analyst should definitely have an overview of the other two segments. The investor should also study the inter-market correlations and dependencies too. 

Technical Analysis

The technical analyst uses the historical price action of an asset with the help of a chart. The charts help to ascertain the supply and demand in the market. But, who creates the supply and demand for an asset? The big financial institutions -Banks, brokerages and hedge funds- who are the fundamental analysts. A technical analyst just cuts to the chase. He uses the chart as a cheat sheet to find out the answers to the hard work of fundamental analyst and trades with it. Smart! Isn’t it?

A fundamental investor will be an early bird in a party, whereas the technical investor is a latecomer. But both enjoy the party in their own way. An early bird will have his incentive of happy hours while a latecomer needs to pay the price for his late arrival, at times.

But recent investment patterns depict a different story. Fundamental analysts were crying overvaluation and exiting early whereas technical analysts were profiting from the extended bull run in every segment. The technical analyst also takes advantage of the short-term volatile movements which many fundamental analysts treat as a noise.

A truce in the debate – Technical Analysis vs Fundamental Analysis

Every fundamental news and factor will be reflected in the chart technically one way or the other. Hence, there is no meaning in extending the debate on the best – Technical Analysis vs Fundamental Analysis. Instead, let’s see what is feasible for a retail trader or an investor.

Technical analysis of Stock Market

Technical Analysis of stock market is comparatively tougher than the other two segments. It produces a lot of fakeouts. The preponderance of stocks doesn’t help in any way too. A serious trader definitely needs advanced stock screeners and fancy tools. Investing with long-term charts always casts a shadow of doubt in an investor’s mind since technicals are prone to frequent change. Though the technical analysis of stock is feasible to a retail investor, the success rate is better for retail fundamentalists with good accounting and finance knowledge. But, technical analysis definitely helps short-term trading.

Technical Analysis of Commodity Market

It’s a tricky one. Technical analysis is easier here because there will not be much of fakeouts. The number of commodities is also less compared to stocks. A trader can choose commodities like crude oil, copper and gold which trade in heavy volume and possess good volatility too. A retail technical trader certainly has a far better success rate than a fundamental analyst. 

Technical Analysis of Forex Market

Always the hero of technical analysis. It follows textbook technical analysis. A sound technical analyst can easily predict the fakeouts. Though there are a number of currency pairs, a trader can pick and choose from the major pairs. Major pairs have round the clock volatility too. Technical Analysis doesn’t require any fancy charting software. Metatrader has it all. (Get Pipbreaker, the best indicator for MT4/MT5 to identify trend reversal points)

On the metric of feasibility, commodity market and forex market are ideal for retail traders. If you are a forex trader and in the process of learning technicals, then you are in the right direction. Learn it, relish it and cherish it! 

Technical analysis vs fundamental analysis


Fundamental analysis

It’s comparatively easy in the stock market.

It is virtually impossible for a retail trader in the commodity and forex market.

In a nutshell, fundamental analysis serves its purpose in long-term investment.

Technical analysis

It is cumbersome in stocks because of the frequent fake-outs.

Whereas, in commodities and Forex, it serves best.

The technical analysis serves its purpose in short-term trades.

Hence the debate – technical analysis vs fundamental analysis is meaningless. Both analyses have their application and necessities.

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