Fundamental vs. Technical Analysis
Description
Learn comparing Fundamental and Technical analysis: a beginner's guide to the pros and cons of each investment analysis method. Knowing the difference between fundamental and technical analysis will help you use the best method to trade cryptocurrencies.
Technical analysis and fundamental analysis - a comparison of investment analysis methods for beginners
Traders, analysts, and investors use various methods and indicators to determine the prices of stocks and currencies, including virtual ones. It's a vital tool for investors because it allows them to maintain the efficiency of the investment and hedge against possible downside risks. The value of these analytical tools also lies in the fact that they are, for the most part, objective methods of analysis without hypotheses or assumptions. Have you guessed what they are? Of course, these tools are fundamental and technical analysis.
In fact, the market offers many opportunities to make money, and only a competent analytics allows you to discover these ways, regardless of the fall or rise in the asset's value.
What are fundamental analysis and technical analysis?
Let's start with the first one. What is Fundamental Analysis (FA)? The name itself should tell us about this method - it is a valuation of a crypto company and its cryptocurrency based on a set of economic, technical, and financial indicators. The method is applicable for most asset types, not only for cryptocurrencies but also for forecasting the value of precious metals, securities, currency markets, and so on. Using FA ensures an informed decision to buy or sell an asset, including cryptocurrency, depending on whether the cryptocurrency trades at a discount or a premium to its fair price.
Fundamental analysis is often used in the cryptocurrency market and other markets, including the stock market, forex, etc. In this case, various factors that can affect the price of an asset are considered.
Fundamental analysis for crypto projects: the main differences
The investor's reliance on fundamental analysis is very high. Fundamental analysis allows you to evaluate the existing supply of valuable assets on the market and adjust your portfolio for greater profitability. For example, to find an overbought asset, the price of which should be discarded while it is still high. Or an undervalued asset which will soon begin to increase in value.
For the stock market, one studies the prospects of changes in the value of a particular asset based on a set of factors. More often than not, the profitability of the company issuing the security, the innovativeness, and usefulness of the business, market share, debt load, additive ratios, external factors affecting the overall movement of the industry, and so on, are evaluated. All of these factors are quite dynamic and constantly changing. In addition, fundamental analysis is aimed at investigating the long-term prospects.
For a crypto project, the valuation system in fundamental analysis is slightly different from classical markets. It's influenced by the specifics of the digital asset industry. Therefore, in addition to the standard set of factors, the following indicators are also investigated:
- How can the company's cryptocurrency be used, and what are the goals of the issuers?
- How much demand is for the project, how is the community supported, and what values are broadcast?
- Technical indicators (on which blockchain network the coin is created, activity, number of transactions, network hash rate, and so on)?
- Who is the team, and how expert are the developers?
- The number of users of the blockchain network.
- External factors and negativity in the market are the stages of the economic cycle.
- Adherence to the marketing strategy.
The goals of using fundamental analysis for an investor
It is important to understand the purpose for which one or another type of analytics is used. For FA, it is relevant to test scenarios of the influence of various external factors. These can be micro and macroeconomic parameters, the objective quality of the project and its implementation, regulatory pressure, political factors, and so on. FA considers all the risks and their pressure on the price to give a medium- and long-term forecast.
Technical Analysis: what is it?
Great, we understand what fundamental analysis is. Let's deal with the second concept. Technical analysis (TA) is a set of methods to assess the situation on the market used to identify statistical patterns in the movement of prices for cryptocurrencies. The main purpose of technical analysis is to determine the most likely scenarios of price movements in the market in the short and medium term.
Technical analysts draw on many charts and trends, various support and resistance levels, and the behavior of crypto prices.
It is worth noting that novice analysts and traders often do not notice the difference between technical and fundamental analysis. Nevertheless, it exists, and one should know it to make more or less precise forecasts about shares and currencies on the markets.
Technical analysis for crypto projects: the main differences
What is the main difference between technical analysis for crypto projects? Most likely, it is necessary to consider the specifics of this segment and apply them in the analysis.
Oddly enough, the attitude towards cryptocurrencies affects, in a small dose, the general approach to Technical analysis. It's a method of analyzing the exact numbers of price movements. Prices are the same in all markets, and so are the patterns that emerge historically. Therefore, the analysis is very universal and suitable for many markets.
At the same time, TA is very versatile. These are charts and models, technical indicators and oscillators, and a combination of different techniques and methods. It's data on volumes. In all its diversity, there are just three key tenets:
- always all factors influencing the price are already embedded in the chart, this is an axiom of the market;
- the price always moves in trends, and its movement can be predicted if you read the chart correctly;
- History is cyclical, everything repeats itself.
Purposes of Technical Analysis (TA)
The use of technical analysis (TA) plays a very important role. Traders can accurately enough predict an asset's price changes and earn from the volatility of the exchange rate. Professional mastery of this tool makes earnings in trading stable and available.
Fundamental analysis vs. technical analysis
Difference between fundamental analysis and technical analysis, what is it? Fundamental vs. technical analysis have certain differences. Analysts who do the technical analysis first look at the charts, while analysts who do the fundamental analysis first look at a company's financial statements.
A fundamental analyst tries to determine companies' prices by checking income statements, balance sheets, and reports showing the movement of finances. Based on the abovementioned figures, he wants to determine the company's intrinsic price by discounting the cost of future financial flows.
In contrast, a technical analyst believes that looking at a company's financial statements is counterproductive because the crypto price already includes all the necessary data. Instead of looking at a company's financial statements, the focus is solely on analyzing the cryptocurrency chart. And based on its study, a prediction is made as to which way a firm's crypto price may move.
Trading tools for different types of analysis
Technical and fundamental analysis use different trading tools. However, there are both.
In particular, as mentioned before, the most important source of information for the fundamental analysis is the companies' financial statements. These include:
- Annual and quarterly accounting reports;
- Proofreading the public reports of the company's shareholders and top executives;
- The company's balance sheet;
- Profit and loss statements for the selected period;
- Analysis and proofreading of the company's cash flow data.
Information from the reports mentioned above can be used to calculate ratios and indicators that reflect the performance of companies and the pace of their development. In cryptocurrency, a few more technical documents like tokenomics and IDO exit plans are added here to evaluate a company's future.
Technical analysis uses other tools, very often, they are built into the trader's cabinet and allow you to read the chart of the asset's rate right from the user's cabinet. Most often, price charts are used:
- Candlesticks in cryptocurrency rates;
- Analysis of the volume of liquidity in the stock market;
- Trader's activity in the trading pair;
- Line graphs of exchange rates.
In general, technical analysis also operates with a large number of tools to make accurate predictions. The main difference between technical analysis and fundamental analysis is that they have different time horizons for price movements. Technical analysis differs from fundamental analysis because they have different time horizons.
Time horizon for different types of financial analytics
Technical analysis vs. fundamental analysis differs in that they have different time horizons. Fundamental analysis takes a long-term approach to invest. The information analyzed can be used over a time of several quarters to several years. It all depends on the depth of the research and the purposes for which it is being conducted.
In addition, those who use fundamental analysis rely on their assessments of the financial reports each company provides quarterly.
In addition, the implementation of lanes and developments in companies does not happen overnight. Many technological processes and production take years, and the effect of a promising innovation will be felt just after such a long preparation.
Another difference between the different approaches to analytics approaches is the time horizon of technical analysis. The timeframes used in TA analytics are much shorter. They are weeks and days, but usually a few hours or even minutes. It's due to the maneuverability of TA targets. Traders anticipate quick trades and make them immediately from there, they don't spend a long time buying an asset.
Analysts who perform this analysis study the information available during the above time intervals using a set of graphical indicators. On this basis, they make their short-term prognostic models of where the value of cryptocurrencies or company assets might move.
Trading vs. Investing: which path to choose for analytics
Technical and fundamental analysis often have different goals. A technical analyst tries to identify many short- and medium-term deals in which he can sell cryptocurrencies.
In contrast, a fundamental analyst makes a long-term investment in the underlying business of cryptocurrencies.
There is a lot of criticism of fundamental vs. technical analysis that appears from time to time in specialized forums and publications dedicated to stock, currency, and digital cryptocurrency markets. In general, it can be considered quite reasonable, although some publications are overly critical.
If we consider the impact of different types of analysis on a cryptocurrency investor's goals: Trading vs. Investing, it is safe to say that different participants should use different approaches to analysis. For example, fundamental analysis is more appropriate for an investor. In this way, global parameters that influence the whole price movement of an asset are studied, which is interesting for an investor. For a trader, it is more important to study the chart of an asset at the moment. It does not even matter whether the price will fall, rise, or flat. It is important to timely orient in the market and work out this ratio. The TA is suitable for this purpose.
Criticisms of different types of forecasting
Many critics accuse technical and fundamental analysis of insufficiently reasoned research and calculation inaccuracies. It's unsurprising because the method's effectiveness depends, among other things, on the effectiveness of the human expert or the program, which considers the pressure factors. In addition, there are a number of risks that are impossible to calculate: for example, political, artificial, or natural.
To improve the effectiveness of research, use more information and assess various risk factors, not just highly specialized ones. Use more knowledge, up-to-date software, and research.
Can they co-exist together?
Technical vs. fundamental analysis, can they co-exist together? Of course, investors try to use the maximum risk assessment tools available to them, so the co-existence of these two types of analysis is not uncommon.
An investor can examine one digital asset for short-term trading and analyze its prospects. Therefore, joint use is not ruled out. At the same time, everyone must assess their information needs.
Advantages and disadvantages of fundamental analysis
Fundamental analysis has its advantages, as well as certain disadvantages. The benefits are that this analysis makes it possible to determine more or less precisely what the real price of companies is. It's extremely important if the investment is supposed to be long-term.
Also, it can significantly reduce possible shortfalls in the investment portfolio through a competent allocation of assets. The statistic shows that decisions that are based on fundamental analysis are more often than not correct.
At the same time, it has some disadvantages. They lie in the fact that it is necessary to possess unique information to make the right forecasts. As a rule, such information is not publicly available, and only some investors have it in the markets. With it, the analysis is likely to be accurate.
It needs to provide information about what can happen in the market within a few days or weeks. In addition, factors that have not been considered in any way in this type of analysis can influence the company's state and completely change the picture of what is happening. It's what the main disadvantages of this type of analysis look like.
Technical analysis: what are its advantages and disadvantages
The main advantage of this type of analysis is that it allows you to assess the shares quickly, enabling you to automate several processes and saving time for the specialist.
A trader can create an investment strategy with clear risk and profit profiles. This type of analysis helps to determine the factors which are inaccessible to the fundamental analysis.
But it has disadvantages. It is subjective. The evaluation is influenced by an analyst's experience and their preferences in working with this or that database. Often there are situations when analysts get opposite results, even though the input data is the same.
Technical analysis has a high margin of error in calculations, which can cause investors to incur significant losses during trading in the markets.
Conclusion
In conclusion, both types of analysis are important to traders, investors, and other market participants. Despite the fact that they are opposite in nature, with their help, it is possible to make relatively accurate investment strategies and enter the markets at the most favorable moment.
They have their supporters and opponents, claiming that only one or the other analysis is the best and correct. Nevertheless, experienced traders and investors apply the advantages of fundamental and technical analysis in their activity and thus receive considerable profit.
It is worth noting that there are other methods to form trading or investment strategies. But the difference between technical and fundamental analysis and their basic tools which every participant of the exchange and crypto market should know if he wants to make a profit and minimize risks of loss.
Everyone who is going to invest or trade on markets can learn what is fundamental analysis and technical analysis.