Technical analysis & Fundamental analysis of Financial Markets

Technical analysis and fundamental analysis are two faces of the same coin (yet opposite) used to analyse the securities market. Both of these are used by analysts to invest/trade in the securities market (To Forecast upcoming moves in the market).

Let’s Learn both of them so you can choose which one’s for you, or you can also use a combination of both

Fundamental Analysis

• FA is a method of ascertaining the intrinsic value of a security which is basically the ‘Real value’ or ‘Fair value’, which is followed by comparing the current value to ascertain whether the security is undervalued or overvalued.
• Fundamental Analysis is basically studying the CAUSE of movement in the market price of a security. Fundamental analysts are more concerned about the reason WHY prices rise or fall.
• Data used by financial analysts:-
  • Historical data
  • Data publicly available
  • Data publicly not available(👻😶‍🌫️)
• Fundamental analysts study both Micro-economic as well as Macro-economic factors that can affect the security’s value

• Fundamental analysts study both Micro-economic as well as Macro-economic factors that can affect the security’s value
• Fundamental factors that analysts need to keep in mind: -
  • Balance sheet
  • Income statement (Profit/Loss A/c)
  • Cash flow statement
  • Business Model
  • Future Prospects of company and sector as well
  • Management of company
  • Shareholding Pattern
  • Political environment
  • Fiscal/Monetary Policy
  • Competitor Analysis
  • Currency fluctuations
  • International Market Conditions
  • And many more factors

Fundamental factors are divided into 2 categories: -

• Qualitative
• Quantitative

Key Points Related to Fundamental Analysis: -

• Generally used by Investors, investing for mid-term and long term (ranging from few months to years).
• You must have (or acquire) knowledge of fundamental factors then only you can analyse them effectively.
• It’s been observed that Investors use Technical analysis along with Fundamental analysis, to determine Entry, Exit and Stop loss.

For more information related to Fundamental Analysis – Checkout here

Technical analysis

• Technical analysis is predicting the future trend of a security by the study of market action, by use of charts. Technical analysis is also referred to as Charting, Price action trading.

• Technical analysis is studying the EFFECT of change in fundamentals of the security. It is not concerned about any of the fundamentals of the security. “Technical analysis is referred to as Indirect study/Backdoor study/Shortcut study of Fundamentals.”

• Sources of information to technical analysts: -
  • Price
  • Volume
  • Open Interest (Future and Options)
• Technical analysis is based on 3 premises/assumptions: -
  • Market action discounts everything
  • Price moves in trends
  • History repeats itself

Technical analysis Indicators: -

• There are 100s of indicators used for technical analysis
• Some indicators are focused on forecasting the upcoming trend (Support and resistance, Fibonacci retracement)
• Some indicators are focused on determining the strength of a trend (RSI, ADX)
• Though all indicators are based on 2 things – Price and Volume.

Key points related to technical analysis: -

• Generally used by traders for short term or midterm trades/investments (ranging from seconds to months). Used in long term investments also using longer timeframe in indicators. As soon as the indicator turns negative, they move out of the trade.
• In technical analysis, no prior knowledge of fundamentals is required.
• Technical analysis is simpler and easier as compared to fundamental analysis.
• While analysing securities technically, you must be aware of manipulators in the market.

To know more about the power of Technical analysis checkout - Technical Analysis of the Financial Markets By John J. Murphy

Conclusion

Now the final question arises, should you use technical analysis or fundamental analysis?! And the answer depends on: -

• The markets you trade in: -

Technical analysis is applicable in mostly all types of markets, whether it is stock market (cash or futures), commodities, forex or cryptocurrencies, you just need its historical data of chart of respective factors. However Fundamental analysis is applicable in markets where historical data of fundamentals, which is available in very few markets. Like we can’t use Fundamental analysis effectively in Cryptocurrencies.

• Trading/Investing: -

If you want to trade the markets then you should go for technical analysis. But if you are an investor then Fundamental analysis is preferred.

• YOU: -

The most important factor is you. You should choose one that suits you, your mindset, your lifestyle.