Fundamental Analysis vs. Technical Analysis: Which is Better?

In the world of investing, there are two main approaches to analyzing the market and making decisions: fundamental analysis and technical analysis. Each has its own characteristics, advantages, and disadvantages.

Warren Buffett uses fundamental analysis, while Takashi Kotegawa uses technical analysis, and both have become millionaires through their investments. The secret of these investors is that each applies the system that best suits their respective personality.

In this article, I will explain both methods in detail and help you decide which one is right for you.

Article summary

Fundamental analysis focuses on a company's financial and economic data to determine its true value.
Technical analysis uses charts and price patterns to predict future market movements.
Fundamental analysis is more suitable for long-term investments, while technical analysis is used more for short-term trades.
Both methods have their advantages and disadvantages, and can complement each other.

What is fundamental analysis?

Basic concepts

Fundamental analysis is about unraveling a company's financial foundation to understand its true market value. What we aim to do with fundamental analysis is to delve into a company's accounting and value it through its debt, revenue, free cash flow, and other key metrics.

Two very popular ways to do fundamental analysis are Value Investing and Growth Investing (What are the best courses for doing Value Investing?).

Key factors in fundamental analysis

To perform a fundamental analysis, several aspects are evaluated; here I cite some of the main ones:

Financial data: Income, profits, expenses, assets and liabilities.
Some financial ratios used are : P/E, Free Cash Flow, EBITDA, ROE, etc.
Macroeconomic factors: Interest rates, economic trends.
Qualitative factors: Management and corporate culture, market position, innovation and sustainability, analysis of the company's management, etc.

Advantages and disadvantages of fundamental analysis

Advantages:

It provides a long-term view of the company.
It helps identify undervalued stocks with growth potential.
It offers protection against market volatility.

Disadvantages:

It takes a lot of time and effort to analyze all the data.
It is not useful for short-term investments.
It can be complicated for beginners.

Example of fundamental analysis with Amazon

Fundamental analysis isn't just about numbers; it's about understanding the business behind those figures. This allows us to assess not only a company's current value but also its potential for future growth and success.

What is technical analysis?

Principles of technical analysis

Technical analysis is based on the premise that all factors that can affect an asset's price are already reflected in its chart. This includes news, events, and financial reports. The idea is that the patterns identified in the charts reflect the collective psychology of the market—that is, the emotions, expectations, and fears of investors. In this way, technical analysis can identify patterns in the price chart that can predict what will happen to an asset's price.

Tools used and methods for performing technical analysis:

Technical analysis can be performed in different ways; here are some of them:

Price and volume trading: This involves analyzing the market without using technical indicators, relying solely on price action and its relationship to volume. I confess that this approach best represents my style as a trader.
Trading with Order Flow: Order Flow is a set of tools that allow you to analyze the flow of orders. These generally include: Delta, Cluster Charts, Order Maps (a good platform to start using Order Flow is ATAS).
Algorithmic trading: Algorithmic trading is based on the use of technical indicators, and is ideal for scalping.

Advantages and disadvantages of technical analysis

Technical analysis has several advantages and disadvantages that we must consider:

Advantages:

Easy application: It can be applied to any asset that has a minimum trading volume.
Accessibility: It is relatively easy to learn, especially with the tools available today.
Risk management: Allows you to identify support and resistance levels, facilitating the placement of stops and profit targets.
Short-term effectiveness: It is especially useful for short-term trading, where fundamental analysis may have limitations.

Disadvantages:

Illiquidity: Assets with low trading volume can be easily manipulated by a few traders.
Subjective interpretation: The reading of charts can vary between analysts, which introduces bias into decisions.
Self-fulfilling prophecies: Technical levels can become irrelevant if many traders act on them, creating a bubble effect.

Example of technical analysis using Bitcoin:

Key differences between fundamental analysis and technical analysis

Approach and methodology

Fundamental analysis focuses on evaluating the intrinsic value of a company or asset, considering factors such as revenue, earnings, and the economic environment. In contrast, technical analysis is based on studying price patterns to predict future market movements.

In other words, a technical analyst will not need to know how much the analyzed company has earned in the last quarter because they consider that all that information is already expressed in the price chart.

Investment time horizon

One of the most notable differences is the time horizon. Fundamental analysis is ideal for long-term investing, as it seeks to identify a company's true value, which may not be immediately reflected in its market price. On the other hand, technical analysis is more suitable for short-term investing, as it focuses on identifying trends and trading opportunities over shorter periods.

Type of data used

Fundamental analysis uses financial and economic data, such as balance sheets, income statements, and macroeconomic conditions.

In the following screenshot you can see the valuation template used by the students of Enrique Valdecantos's Value Investing course.

Valuation template - Valdecantos stock market course

In contrast, technical analysis is based on historical price data, using tools such as charts and technical indicators.

Understanding these differences will help you choose the approach that best suits your needs and investment goals.

Which one is better for beginners?

Ease of learning

For beginners, technical analysis can be easier to understand. You don't need to be a math whiz to interpret the data displayed on a chart.

However, trading with technical analysis isn't easy; it requires study and a lot of practice. Furthermore, there are many ways to perform technical analysis. Algorithmic trading is an automated method that relies heavily on technical indicators, while trading based on price and volume largely disregards them. Finding the trading style that best suits your personality isn't always straightforward.

Available resources

There are plenty of resources available for learning both types of analysis. However, finding information on fundamental analysis is easier since there are no secrets to it.

In fact, you can learn fundamental analysis with a couple of good books on the subject: 'The Intelligent Investor', 'The Little Book That Still Beats the Market', or 'The Little Big Book of Value Investing' are excellent books to start with to familiarize yourself with this investment methodology.

Of course, learning through a book (or several books) is not the same as training with an online stock market course (What are the best investment and trading courses?).

Technical analysis is different. While there are many online courses and tutorials that teach you how to read charts and use indicators, not everything is useful or advisable. Technical analysis is like art: there are many techniques, but interpretation is personal.

One of my favorite technical analysis trading courses is Ferran Font; I suggest you check out his YouTube channel to familiarize yourself a bit with this investment system.

Is it possible to combine both analyses?

Hybrid strategies

Absolutely, I do it all the time with the help of a screener (I use Danelfin). Combining fundamental and technical analysis can give you a more complete view of the market.

For example, you can use fundamental analysis to identify undervalued stocks and then apply technical analysis to find the best time to buy. This combination allows you to get the best of both worlds.

Success stories

Many successful investors use both types of analysis. For example, Warren Buffett focuses on a company's fundamentals but also considers market trends. Another example is forex traders who analyze economic news (fundamental) and then look at price charts (technical) to make decisions.

Implementation tips

Start simple: Don't try to master everything at once. Learn the basics of both analyses first.
Use the right tools: TIKR and Morningstar are two of the best-known and most widely used fundamental analysis platforms. For technical analysis, there's TradingView, one of the trading platforms among technical analysts (you can see the best free technical analysis tools here).
Practice: Practice makes perfect. Use demo accounts to test your strategies without risking real money.

Common mistakes in fundamental and technical analysis

Errors in fundamental analysis

Ignoring the macroeconomic context: Sometimes we focus so much on a company's numbers that we forget how external factors can affect it.
Overvaluing historical data: Believing that the past will always repeat itself can lead us to serious errors.
Failing to update: The market changes and what was true a year ago may not be true today.
Subjectivity: Interpreting data in a biased way according to our expectations can cloud our judgment.

Errors in technical analysis

Analysis paralysis: Using too many indicators can complicate decision-making.
Ignoring unexpected events: News and unforeseen events can invalidate technical patterns.
Limited focus: Only looking at charts and not considering fundamental factors can be a mistake.
Self-fulfilling prophecies: Acting on patterns that many traders follow can cause them to come true, but not always for the right reasons.

How to avoid them

Diversify investment strategies: Do not rely on just one type of analysis.
Stay up to date: The market changes, and you must too.
Knowing your investor profile: Knowing whether you are more short-term or long-term will help you choose better.
Remember that trading is not investing: They are different approaches and you should treat them as such.

Practical applications in the current market

Examples of fundamental analysis

In fundamental analysis, we look at a company's financial health. For example, if you want to invest in a company's stock, you'll review its financial statements, such as the balance sheet and income statement. You'll also consider external factors like the global economic situation and government policies. Good fundamental analysis helps you understand whether a company has long-term growth potential.

Examples of technical analysis

Technical analysis focuses on price movements and (usually) their relationship to trading volume. It looks for trend continuation or reversal patterns. For example, if we see that a stock's price has broken through a significant resistance level, we might consider it a good time to buy. Technical analysis allows you to make quick decisions based on what the price is doing right now.

How to choose the right approach

Choosing between fundamental and technical analysis depends on your investment goals and style. If you're looking for long-term investments, fundamental analysis may be more useful. On the other hand, if you prefer short-term trading, technical analysis might be more suitable. Ideally, you should combine both approaches to gain a more comprehensive view of the market.

Frequently Asked Questions

What is fundamental analysis?

Fundamental analysis is the study of a company's economic and financial data to determine its true value and long-term growth potential.

What is technical analysis?

Technical analysis is based on the study of past price patterns and market activity to predict future movements.

What is the main difference between fundamental analysis and technical analysis?

The main difference is that fundamental analysis focuses on economic and financial data, while technical analysis focuses on price patterns and market trends.

Is it possible to combine fundamental analysis and technical analysis?

Yes, it is possible to combine both analyses. Many investors use hybrid strategies to take advantage of the benefits of each approach.

Conclusion

In short, there's no definitive answer as to whether fundamental or technical analysis is better. It all depends on your investment goals and style.

If you prefer to understand a company's financial health in depth and have a long-term vision, fundamental analysis is for you. On the other hand, if you like to identify trends and take advantage of short-term opportunities, technical analysis will be your best ally.

Ideally, both approaches should be combined to make more informed decisions.

Norberto Viale( Trader and founder of Topstep Experience )

My name is Norberto. I've been investing and trading for over a decade. I'm also the author of the Topstep Experience trading course. If you want to learn how to invest and have any questions, feel free to contact me.