Which is more effective: Fundamental or Technical Analysis?

Which is more effective: Fundamental or Technical Analysis?

When it comes to analyzing financial markets, There are two main approaches; fundamental and technical analysis. They are hotly debated topics. Proponents of either type of analysis frequently dismiss the alternative, but both have a place. 

Long-term investments are best served by fundamental analysis, whereas short-term trading and market timing are better served by technical analysis. Alternatively, both can be used in conjunction to plan and execute medium and long-term investments.

When it comes to determining the intrinsic value of a security, fundamental analysis looks at various macroeconomic and microeconomic factors. The ultimate goal of fundamental analysis is to determine how much security is worth on its own merits. Investment decisions can then be made based on how well the stock’s intrinsic value matches up against its current market price.

As opposed to technical analysis, fundamental analysis is concerned with determining the “correct price” (true value) of security. Technical analysis is concerned with forecasting a security’s price movements. An investor can make an informed investment decision if he or she knows what the right price is. Depending on the circumstances, security can be overvalued, undervalued, or fairly valued.

Using historical market data, technical analysts can forecast security’s likely future price movement – such as a stock or currency pair – based on the security’s current price.

For technical analysis to be valid, it must be supported by the notion that the collective actions – buying and selling – of all participants in the market accurately reflect all relevant information pertaining to a traded security and, as a result, consistently assign a fair market value to the security in question.

Although the concept of combining technical and fundamental analyses is not always well received by the most dedicated groups in each school, there are advantages to at least understanding both approaches.

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