Whether you are investing in stocks or cryptocurrencies, this guide will explain what fundamental and technical analyses are and which one to choose.
The contentious debate among traders and investors over what analysis technique is best has been going on for quite some time. On the one hand, fundamental analysis has proven to work especially for seasoned investors, such as Warren Buffet and Ralph Seger.
On the other hand, technical analysis has its own merits. In several markets around the world, traders have made millions with the help of technical analysis.
The reality, however, is that a combination of both produces the best results, especially in the crypto space, where nothing is easily predictable.
Here is an in-depth look at both techniques with comparisons that will help you make an educated choice.
What Is Fundamental Analysis?
Investing and trading in any market is all about evaluating the value of an asset to determine whether that asset is worthwhile either in the short or long term. Fundamental analysis is the process of measuring the value of an asset based on related economic or financial factors.
In the case of the stock market, a fundamental analyst would consider the company’s intrinsic value by looking at that company’s balance sheets, the overall economic trends that are bound to affect the industry, and an overall look at the company’s internal mechanism.
This type of analysis is normally considered ideal for long-term investors. At its core, fundamental analysis measures the intrinsic value of an asset by evaluating all the tangible and intangible aspects of the company or investment using publicly available information. The aim is to best determine whether the asset is undervalued or overvalued.
What Is Technical Analysis?
Technical analysis, on the other hand, is a trading technique that evaluates the value of an investment based on statistics and trends of that asset’s price movements and trading volume.
Technical analysis is built on the belief that past price movements and market activity of a given asset can be used as a valuable source of information to determine the future price trajectory of that asset.
While a fundamental analyst focuses on the company’s intrinsic value and measures the company’s capacity to increase earnings as well as that company’s assets, a technical analyst will only look at the price history and trading volume of the asset.
Technical analysts use math equations, charts, and graphs to determine trends and patterns that support either a buy or sell signal. Since the underlying business is not a consideration, the technical analysts will measure these signals in comparison with other technical indicators that support a similar narrative. While fundamental analysis encourages the investor to search out a company's inherent value, technical analysis is concerned with methods that forecast the price action of the asset.
What Are Technical Indicators?
Technical indicators form the basis of technical analysis. They comprise pattern-based signals that are produced by the price and trading volume of an asset and enable a trader to learn and predict future price movements of that specific asset.
Technical analysts use technical indicators to study and analyze the historical data of an asset’s price and other market movements to determine favorable entry and exit points of trades.
Overall, there are four categories of technical indicators, including trend indicators, momentum indicators, volume indicators, and volatility indicators.
As you would expect, trend indicators show the overall direction of the market. These indicators are also called oscillators as they move between high and low values forming a wavy pattern on charts and graphs. Examples include Moving Average Convergence Divergence (MACD), Parabolic SAR, and parts of Ichimoku Kinko Hyo.
Momentum indicators are used to indicate the strength of a trend. They are also used to determine when a trend in the market is about to reverse. Most traders use these types of indicators to predict when the price trajectory of an asset is about to change. Momentum indicators include Average Directional Index (ADX), Relative Strength Index (RSI), and Stochastic Oscillator.
The class of volume indicators is made up of tools used to determine the intensity of a buying or selling market orders of a specified asset. These include the on-balance volume (OBV) indicator, the volume indicator, Klinger Volume Indicator, and Chaikin Money Flow indicator.
Lastly, volatility indicators are used by traders to determine how frequently the price of an asset is changing within a given period. The faster the price changes, the more volatile it is. Examples of such indicators include Bollinger Band.
The Best Technical Indicators for Crypto Assets and Stock
Here is a look at some of the best technical indicators you can use for trading crypto assets as well as stocks.
- On-Balance Volume: This is a technical indicator that uses an asset’s changing trading volume to make price predictions.
- Accumulation/Distribution Line: This indicator is used to measure the flow of capital into and out of a market.
- Average Directional Index (ADX): This indicator measures the supply and demand of an asset to determine the strength of existing price trends in that market.
- Aroon Indicator: This indicator is used to identify the strength of a trend as well as changes in an asset’s price movement.
- Moving Average Convergence Divergence (MACD): Investors and traders use this indicator to determine the strength of a trend in the price of an asset.
- Exponential Moving Average (EMA): The Exponential Moving Average is a variation of the moving average indicator that is used to measure the average periodic price changes over time to produce, buy and sell signals for the trader or investor.
- Relative Strength Index (RSI): This is a momentum indicator that determines whether an asset is overbought or oversold by evaluating the magnitude of recent price changes.
- Stochastic Oscillator: Similar to the RSI, the Stochastic Oscillator is a momentum indicator that determines overbought and oversold conditions in the market.
Fundamental Analysis vs Technical Analysis
Even though fundamental and technical analysis is different, most traders prefer to use a combination of both techniques since each has its own set of pros and cons.
However, combining both techniques still requires a great deal of skill as both strategies need to be tested for different markets to determine their viability. Typically, novice traders tend to use fundamental analysis as it requires fewer technicalities, while technical analysis is popular among professionals with years of experience.
Overall, even for newcomers to the crypto trading sector, various educational sources are available that can help you formulate workable strategies that combine both techniques.
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