There is a prolonged debate on the superiority of both analyses, or in short: fundamental analysis vs technical analysis. I can recall my days as a derivatives dealer where some clients prefer to read news, while others like to draw charts.
But for sure both types of analyses have their own merits as it measures the price trajectory of the markets.
What Is Fundamental Analysis?
Fundamental analysis refers to analysing the information from the news and reports. The investors will assess the information in hands and make attempts to predict the direction of the asset’s price.
What Is Technical Analysis?
The technical analysis on the other hand is a price action strategy. The investors will evaluate the market breadth based on the readings of price trend patterns, indicators and oscillators; then draw a conclusion on future market sentiment. So, based on the definition, which is more appropriate and why?
The news have heterogeneous impacts on the financial markets. A group of markets may receive the same news, but the investors will react differently. The COVID-19 news for instance, may trigger a bearish sentiment but the magnitude of impacts on the financial markets in the developed and emerging markets will be different. Therefore, it is crucial that the investors to understand how the asset price in their portfolio moves.
According to the empirical finance, generally there are three main stages of asset movement which are called information arrival, co-movement and volatility. At the stage of information arrival, investors receive and react on the information upon receiving them.
In the second phase, the asset influences the other assets or markets. Next, when there is the absence of news, but the price is constantly moving, we call it the stage of volatility.
Fundamental Analysis vs Technical Analysis
To decide on when to use the fundamental or technical analyses, the investors need to know their portfolios well such as the sensitivity to news and the movement of interrelated markets. Applying the fundamental analysis needs a good knowledge of portfolio sensitivity.
The best example is the stock’s beta to index. The fundamental analysis is best to use in the first and second stage. While some commodity markets like energy and agriculture futures, the investors are depending on the EIA and USDA reports however the information on production numbers and demand will not being released so frequently.
In this case, it is preferably to use fundamental analysis to determine the market sentiment thereafter technical analysis is used to time the entry and exit.
By and large, fundamental and technical analyses are tactical in investment and trading. The investors should assess the market sentiment based on the news, and time their entry using the price charts. It is worth to note that regardless of trends, either bearish or bullish, the price will not move linearly.
There must be the phases of corrections, retracement, rebounds and reversals amidst of the major trend. The news may set path for the major trend, but the trading motivations of buyers and sellers determine the intertemporal price dynamics.
So in the case of fundamental analysis vs technical analysis, which one do you prefer? They say if you are an investor, then you should use fundamental analysis. If you are a trader, then you should be using technical analysis. Or can we use both?
About the Author
Dr. Ahmad Danial is a Certified Financial Technician (CFTe) and Senior Lecturer in Finance at Department of Economics and Financial Studies, UiTM Puncak Alam. He has over 10 years’ experience in the financial markets before hopping into the academia. His areas of expertise include financial contagion, trading in stocks and derivatives markets, price discovery, hedging strategy, Econophysics and technical analysis. He can be reached at firstname.lastname@example.org.