Technical Analysis and Fundamental Analysis

Differences between Technical Analysis and Fundamental Analysis

A technician’s research is solely based on price and volume data. Further, the researcher  believes that all factors are reflected in a security’s price. A fundamental analyst, on the other hand, investigates a company, including data from outside the market. Such  data include political and societal factors. It is such data that a fundamental analyst uses  to forecast security price movements.

Fundamental analysts utilize multiple estimations and assumptions. Technical analysts, on the other hand, use more specific facts such as volume and price. A lot of the data used by fundamental analysts  are  susceptible to management’s opinions. As a result, financial data may, for instance, be restated as a result of accounting adjustments or fraud. In comparison to fundamental analysis, technical analysis is more objective. However, once the data has been analyzed, both techniques become subjective.

While  fundamental analysis is a more theoretical approach,  technical analysis is  more practical.  Fundamental analysts try to predict the price at which a security should trade, whereas technicians try to predict the trading price.

Technical analysts limit their focus to  market fluctuations. They, therefore, do not employ other predictive analytical techniques such as forecasting a company’s future sales. Price changes are generally studied by technicians; yet, prices can shift suddenly and without warning.

It may take some time for a trend to become discernible . Technical analysis, like fundamental analysis, lags  the detection of a price change. This can result in positions being opened or closed too late or too early.

Both technical and fundamental analysis can be utilized in tandem. Technical analysis can establish an acceptable entry or exit point, while fundamental analysis can identify an undervalued or overpriced security.

Technical analysts often use fundamentals to back up their trades. This can be done by looking at the fundamentals to see if a stock will outperform expectations and if a breakout is conceivable.

Interpreting Technical Analysis in Various Types of Markets

Technical analysis is the best and the easiest approach to utilize in liquid and deep markets because it is a trading instrument that relies on liquidity. It’s ineffective in illiquid markets, where even tiny trades can have disproportionately large price effects.

Gap openings are common in lightly traded securities. They are the areas of the chart where the price of an asset dip or rise from the previous day’s closing price without any transaction  taking place in between.

Stocks, commodities, and currencies are just a few asset groups that can be studied using technical analysis.

The primary difference between retail and institutional investors is that retail investors have less in-depth knowledge and are more focused on momentum than institutional investors. As a result, individual investors rely on technical analysis and momentum trading more than institutional investors. Liquidity is also important  to institutional investors.

Question

Which of the following is most likely a principle of technical analysis? Technical analysis:

1. uses multiple estimations and assumptions.
2. is used to predict the price at which a security should trade.
3. uses objective data.

Solution

 The correct answer is C.

Technical analysis uses objective data such as price and volume.

A and B are incorrect. Fundamental analysis uses multiple estimations and assumptions and is used to predict the theoretical price at which a security should trade. On the other hand, technicians try to predict the next short-term trading price or range for a given security.