In this lesson, we will examine the two main analytical methods used by investors in financial markets: technical analysis and fundamental analysis. Although both share the same goal—to help investors decide whether to buy or sell securities or cryptocurrencies—they are based on different approaches and data types.
Fundamental Analysis
Fundamental analysis focuses on evaluating the “fundamentals” of a company, cryptocurrency project, or economy, such as its financial health, growth prospects, and macroeconomic environment. Investors use this method to determine the intrinsic value of a stock and then compare it to its current market price.
This process includes several stages:
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Macroeconomic analysis: Assessing the overall attractiveness of the market, taking into account factors such as the socio-political situation, economic policies, inflation, employment, and the people involved in the project.
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Sector analysis: Evaluating the outlook of specific economic sectors—in the case of cryptocurrencies, the project’s ecosystem.
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Situational analysis: Analyzing the project’s position in the market and its development potential.
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Financial analysis: Reviewing a company’s financial statements and calculating financial ratios.
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Valuation: Determining the intrinsic value of a stock using methods such as discounted cash flow (DCF).
Fundamental analysis is typically used by long-term investors looking for “value” companies or forward-looking projects whose market price is below their estimated intrinsic value.
Technical Analysis
Technical analysis, in contrast, focuses on studying price and trading volume to predict future price movements.
The key elements of this method include:
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Market trends: Identifying the general direction in which security prices are moving.
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Technical indicators: Mathematical tools used to analyze price and volume patterns.
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Price patterns: Chart formations that may signal future price movements.
Technical analysis is often used by short-term traders who look for opportunities to profit from price fluctuations over short periods—though in this context, even a one-year cycle may be considered short-term.
Key Differences
The fundamental difference between technical and fundamental analysis lies in the type of data used. Fundamental analysis relies on financial and macroeconomic data to assess a stock’s intrinsic value. In contrast, technical analysis uses historical data on prices and trading volume to identify patterns and market trends.
Moreover, fundamental analysis is generally applied with a long-term perspective, while technical analysis, as mentioned above, is more often used for trading in shorter timeframes.
In summary, both methods have their place in an investor’s toolkit, and their effectiveness can depend on the investor’s style and goals. Many people use both methods to gain a more comprehensive view of the market and make better-informed investment decisions.
