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Technical and fundamental analyses are two different ways of interpreting and forecasting markets. Traders rarely rely exclusively on one or the other, and neither can forecast market movements with absolute precision or infallibility.
Technical analysis
Technical analysis adopts the point of view that markets show discernible patterns, which can be used to predict future movements. It looks to historical data and employs a wide variety of statistical techniques to identify these patterns to forecast market trends.
Analysts using technical indicators like Bollinger Bands, the relative strength index (RSI) and the moving average convergence divergence (MACD) believe that vital market information is contained within these indicators.
Fundamental analysis
Fundamental analysis looks to a range of factors to arrive at an estimation of a share’s true or ‘intrinsic value’. This value is what the analyst believes the price of a share should be. If this price deviates from the current market price, and you trade based on this, you’d profit if the market moves towards this ‘true’ value. However, if the market moves against your position, you’d incur a loss.
Fundamental analysis focuses on macroeconomic factors, sector performance indicators and industry news, along with information gleaned from publicly available income statements and balance sheets, to arrive at a stock valuation.
If this valuation is, for example, below the current market price – it’s argued – the market price is expected to adjust over time so that the stock is correctly valued. If you trade based on this, shorting the stock, you’d earn a profit if the market moves as expected. If the stock price rises instead, you’d incur a loss.
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