Technical versus Fundamental Analysis 101SELF DEVELOPMENT/METHODOLOGY/PSYCHOLOGY
Technical versus Fundamental Analysis 101
a) Popularity
Fundamental analysis deals with the studies of basic financial information in order to forecast the
supply and demand, profit, strength of the industry, the ability of the management and some
other intrinsic factors, which influence the value, and the growth potential of the FOREX market.
In the fundamental analysis, various economic and global factors are also considered. This
analysis is also helpful for the forecasting of financial statements as it provides an insight into the
revenues, expenses, assets and liabilities.
Technical analysis is a method of forecasting the prices that tend to move in the trend form and
can be easily determined by altering the behaviour of the individual investor. It can be further
elaborated that this movement in the behaviour can be caused by the variety of factors including
the fluctuation in the economic, political as well as the psychological forces. This type of
analysis is also referred to as the internal analysis and is regarded as an art, in order to identify
the trend changes for maintaining the posture of investment until the weights of the trend are
reversed.
b) Fundamental Analysis
For the purpose of finding the intrinsic value of the currency, economic analysis, country
analysis and industry, the analysis is included in the fundamental analysis. The intrinsic value,
which is resulted from these three analysed figures, is considered as the true value as it possesses
the impact of all the three factors. If the computed intrinsic value is higher than the market price
of the shares, it is recommended that the shares should be bought by the investors. There are
different forecasting techniques, which are used in each of the above-discussed analysis. In the
case of economic analysis, the factors, which can be considered for the forecasting, are National
income growth rates, interest rates, inflation, the balance of payment, and budget of the country,
infrastructure, monsoon and economic and political stability. The economic forecasting can be
done with the help of,
1. Anticipatory surveys
2. Barometric or Economic Indicator Approach
3. Economic Model Building
4. Opportunistic Model Building
The forecasting in the industry analysis will be based upon the growth level of the industry,
profitability and the cost structure, nature of the product, policies of the government, labour and
research and development. Industry analysis can be carried out with the help of porters five
forces analysis. Other forecasting tools can include life cycle analysis of the industry, the profit
potential of the industry and characteristics prevailing in the industry. The fundamental analysis
of the currency will be based upon the macroeconomic arena of the country and the past
behaviour of the monetary institutions. The country analysis can be done with the help of
marketing success, accounting policies and profitability. Accounting policies include the pricing
strategies, depreciation methods, non-operating income and provisions for taxation. Profitability
analysis of the currency includes the various elements of financial statements and the technique
of ratio analysis also.
c) Technical Analysis
Technical analysis utilises different forecasting tools for the purpose of valuation of the FOREX
prices. These tools are mostly graphical in nature, which makes it easier for the investors to
analyse the currencies. The demographic shift will have a relevant effect on the forecasting tools
and techniques, which are identified in the technical analysis. For example, if the age of the
investor is below 25 years, the technical analysis will be preferred as it is less complicated as
compared to the fundamental analysis. The bar chart will be preferred also as it is the easiest
amongst all the graphs. However, if the investor is more than 25 years old, then the results will
be in the favour of fundamental analysis and if in case technical analysis is adapted, candlestick
will be preferred. Occupation and education will also take similar turns in case the investor has a
financial background or possesses non-financial background. It means that if an investor knows
the trading environment and dealings of the currencies, he can easily perform complicated
operations, which can provide effective results. However, the individuals having no or little
knowledge regarding the currency valuation will depend upon simple computations and graphs
identified in the technical analysis for forecasting purpose.
Happy Trading :)
"The goal of a successful trader is to make the best trades. Money is secondary" Alexander Elder
