Differences Between Fundamental and Technical Financial Analysis

For the sake of this article we are going to say there are two different types of financial analysts: A fundamental analyst and a technical analyst. Fundamentally, the main difference between these two is that a fundamental analyst will try and determine if the market accurately reflects an instrument's true value, while a technical analyst trying to determine if an instrument can be profitable based on the current market conditions.

A fundamental analyst will compare the micro and macro economic data and try and determine if the price of a financial instrument is undervalued or overvalued. The fundamental analysts should look at several different aspects of the company including the financial statements, the current strength of the company, any future growth and profitability potential, as well as the current management style. Not only should one examine the style of management being used within the company but also examine the credentials and experience of the executives that run the particular company. The fundamental analysts will examine any research and development projects as well as any pending patent requests. The annual and quarterly earnings sheets will also be heavily examined. Proper analysis of the current economic and political environment is also very important to the fundamental analyst.

In contrast, the technical analyst makes several key assumptions that are greatly different than the fundamental analyst. One assumes that the price of a particular financial instrument already includes any discounts that need to be made based on the factors that a fundamental analyst studies. In other words, the technical analyst isn't necessarily concerned with how a particular stock should be priced, but how the market currently values that stock. Even more important, is how that particular stock's value trends based on market conditions. There are three main points in any good technical analyst will apply. First, regardless of what a fundamental analyst will predict, the price of a particular security reflects all market conditions. Second, the price of any given security will move in a trending fashion. Lastly, any historical trading patterns of a given security will tend to repeat over a given period of time.

Most technical analysts believe that market conditions are not driven by common principles such as supply and demand, but by investor's emotions such as greed and fear. In other words, a particular financial report is itself unimportant, but trader's reaction to this particular report causes the market to fluctuate. This is not to say that technical analysts provide more accurate results than fundamental analyst, but they are significantly different for the above reasons. Interpreting an appropriate combination of both types of analysis can be very important to the successful trader.