In the field of investments, there are two types of analysis: Technical and Fundamental. Both essentially pursue one goal: to predict the price of a financial asset in the short or long term. In today’s article, we will define both concepts, establish their differences, and understand which is the best option for online trading operations.
This model is based on the analysis of the evolution of the price of an asset through graphs, likewise, it uses statistical calculations, which allow predicting what will be the future behavior of the price and what is the best time to open a position.
Technical analysis is composed of chartism (chart analysis: Japanese candlesticks, point, and price or linear charts). All of them show information about the price of an asset either by day, days, or months. The idea is to find patterns and trends for short-term investments. In addition, the charts are complemented with indicators and oscillators, tools that serve to see graphically, support points, rebound points, channels, trends, or signals of trend changes. Some of the most commonly used indicators are MACD, RSI, Stochastic, Moving Averages, Bollinger Bands, and Parabolic SAR.
Advantages of technical analysis:
- Technical analysis allows for predicting price behavior as well as optimal buying and selling moments.
- Technical analysis allows us to detect trends and opportunities to buy or sell in the immediate future.
- Technical analysis can be applied to every trade or trading strategy you use. This model is valid for any asset in any financial market; from currency pairs in Forex to CFDs on stocks, stock indices, or commodities.
Disadvantages of technical analysis:
- There are infinite interpretations of the graphs and this can generate differences in terms of expectations vs. reality in your financial operations.
- Investment opportunities expire in a very short time. If you do not have the mentality and the mettle to act, you will miss many opportunities.
- The learning curve is high, it takes time and a lot of practice to really understand what the charts are showing.
Fundamental analysis, seeks to find the “real” or “theoretical” value of an asset, based on the analysis of the factors that affect its price over time. Macroeconomic data such as GDP, CPI, unemployment rate, or inflation are considered for this type of analysis.
It is an ideal analysis for a long-term investment horizon, of 20-15 years, and it is very common to use it for the purchase of shares and capitalization of dividends. In this scenario, in addition to macroeconomic data, the analysis covers all the company’s financial statements, investment projections, debt capacity, and other factors that influence the stock price.
Advantages of fundamental analysis:
- Fundamental analysis allows us to understand and observe in a more global way what is happening in the financial markets.
- Fundamental analysis requires time and expertise in different economic fields to be really effective.
- It is excellent for long-term investments of 15-20 years. It is proven that in this time the risk of loss is reduced by 90%.
Disadvantages of fundamental analysis:
- Fundamental analysis requires always being alert and attentive to new information and news that may affect the instrument in which you are investing.
- This type of analysis is not 100% applicable to all financial operations. In specific cases, it is better to rely on technical analysis.
What is the big difference between the two analyses?
The big difference is that one tries to decipher the “real” value of an asset from macroeconomic data, and the financial statements of a company (Fundamental Analysis), and the other analyzes the historical behavior of the price of an asset to determine the direction in which it will move in the short term (Technical Analysis).
What analysis is used for trading operations?
As we have been saying, trading is a SHORT-TERM investment, in days minutes, or hours traders can capitalize on profits or lose everything. That is why technical analysis is the one that predominates in trading operations. The analysis of graphs, coupled with the complement of indicators have proven to be effective tools to predict the direction in which an asset will move.
However, it is not infallible, because in trading, in the end, it is the market that is always right. Hence the importance of having your broker close or open positions automatically, since short-term investment opportunities must be executed at the right time, otherwise they will become obsolete.
For your better understanding remember that technical analysis is more used in online trading because it is used to predict the direction in which the price of an asset will move in the short term. While fundamental analysis is used for stock analysis in the long term, 15-20 years minimum, the latter is used to create dividend-compounding investments.
At 24FIVE traders have the freedom to choose from a variety of markets to trade, such as currency pairs, CFDs on stocks, bonds, ETFs, commodities, cryptocurrency pairs, and currency options.
Starting a career in trading is not complicated, but it is important that you are disciplined, and clear about your goal and look for a reliable broker that offers you the tools you need. At 24Five we are here to help you achieve your goals, leave us your details by clicking here to find out how to operate in the exciting world of online trading. follow us
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