Fundamental Analysis vs Technical Analysis

Buy Low, Sell High

If someone wants to profit from a particular trade, they have to buy low and sell high. Now determining lows and highs before it takes place is a tricky thing. So many factors contribute to the price of what we are going to trade. There are many tradable things. Stocks, foreign currencies, cryptocurrencies, commodities, and a lot of more sophisticated things like options, futures, and so on. 

Trading Analysis

There are two types of analysis that we do to try to predict the price of something in the future. If we think that the price will go up, we buy, and if we think the price will come down, then we sell.

The first type of analysis is called fundamental analysis. Fundamental analysis is looking at the fundamentals of a specific entity to assume its current and future value. For example, a company's shares may be evaluated based on what belongs to the company and what liabilities the company has. 

What comes out of fundamental analysis? It'll be like: The current value of this company's each share is $100 and it's going to be $105 by the end of next year. So if its current price is $120, then we don't think it's a good idea to buy it and if it's $80, then it's underpriced and we might consider buying it.

Now the thing is, price and value tend to converge in the long term, but in the short term, they may diverge as well. So fundamental analysis is mostly used by long-term investors as it provides a kind of insurance for their assets.

But short-term investors and frequent traders use another type of analysis more often. It's called technical analysis. Technical analysts use charts, to predict the future price of an asset. They find what they call a support point to buy something and a resistance point or resistance level to sell that.

Technical Analysts often use a stop-loss (SL) level to exit the trade with minimal losses in case the price doesn't go according to their predictions. They also determine a take-profit (TP) level to close their position and take the profit when the price goes along with their predictions. 

While fundamental analysis looks at the underlying asset to put a value on it, technical analysis analyses the behavior of its traders to predict what they will do next.