Both fundamental and technical analysis are methods for analyzing the financial markets. Both these methods have merits and there are successful traders and investors that utilize both these methods of analyzing markets.
The differences between technical analysis and fundamental analysis are:
- Methods Used: Technical analysis and fundamental analysis apply completely different methods for analyzing financial markets.
- Tools Used: Applying technical analysis to a financial market requires a completely different set of tools compared do applying a fundamental analysis approach to analyzing markets.
- Timeframes: Technical analysis tends to focus on shorter timeframes whereas fundamental analysis tends to focus on longer term timeframes.
- Advocates: There is a huge difference in the advocates of these two forms of analysis. Successful traders and investors in these two forms of analysis believe that the other side is not as good.
These are the main differences between technical analysis and fundamental analysis.
Difference In Methods Used For Analyzing Markets
The first and main difference between technical analysis and fundamental analysis is they are two completely different methods for analyzing a financial market.
Technical analysis is a method that focuses on historical price data and price chart patterns of a financial market to help predict future price movements.
Alternatively, fundamental analysis is a method that focuses on financial and economic factors to help predict the future price movements of a market.
An example of how the two methods differ when analyzing Apple stock: A technical analysis approach might not even know what Apple does or sells and will only focus on the price chart of Apple to help predict Apple’s future stock price.
A fundamental analysis approach will know everything about Apple, from earnings to free cash flow to try and calculate its intrinsic value and help predict a future stock price.
Differences In Tools Used For Fundamental vs Technical Analysis
The next difference between technical analysis and fundamental analysis is the tools used to perform the analysis.
Technical analysis requires tools like
These tools are necessary to properly apply technical analysis to a market. Alternatively, fundamental analysis requires a different set of tools.
Fundamental analysis requires tools like:
- SEC fillings
- 10-K & 10-Q’s
- Income statements
- News announcements
- Economic reports
- Economic calendars
Performing fundamental analysis requires access to these tools to do it successfully.
Differences In Timeframes Between Technical Analysis And Fundamental Analysis
Another difference between technical analysis and fundamental analysis is the timeframe or time horizon of a trade or investment.
Typically, a technical analysis approach tends to analyze and see a trade or investment come to completion either intraday or over a few months at most.
Alternatively, a fundamental analysis approach tends to analyze and see a trade or investment come to completion after a few months to multiple years.
Difference In Advocates Between Technical Analysis And Fundamental Analysis
Another major difference between technical analysis and fundamental analysis is that successful advocates that support and follow each approach are completely different.
For technical analysis, successful advocates of this approach include:
- Mark Minervini
- Dan Zanger
- William O Neill
For fundamental analysis, successful advocates of this approach include:
- Warren Buffett
- Benjamin Graham
- Charlie Munger
As shown, the successful advocates for each approach are completely different.
Many well known investors that apply a fundamental analysis approach to investing believe technical analysis does not work whereas many successful traders and investors that use technical analysis believe fundamental analysis is not necessary to make money in the markets.
Which Is Better, Fundamental Or Technical Analysis?
While there is evidence that both the technical and fundamental analysis approach can work, as evident by the number of traders and investors that successfully apply the approach to analysis, which approach is best very much depends on the type of person.
For traders or investors that prefer longer term investments, a fundamental analysis approach might be better as these type of investments tend to take many years before they complete.
On the contrary, for traders and investors that prefer shorter term investments or trades, a technical analysis approach might be better as these types of trades or investments tend to complete much more quickly, typically from intraday to a few months at most.
Alternatively, applying both approaches to investing and trading can also work. Many traders from the US Investing Championship have successfully mixed both types of analysis to make very large returns in the market (1).
While the debate about technical analysis vs fundamental analysis will always happen, there is evidence that both approaches can make a trader or investor a lot of money if applied correctly.
This is evident by the number of successful traders and investors that apply one of the two approaches as part of their trading or investing strategy and have consistently made money for many years with their approach.
Examples of successful investors that apply a fundamental analysis approach are Bill Ackman, Warren Buffett, Charlie Munger etc.
Examples of successful traders that apply a technical analysis approach are Mark Minervini, Dan Zanger, Marty Schwartz etc.