The kinds of analysis, side by side
Technical analysis
- The question it asks
- What has the price done?
- What it looks at
- The history of price, and of volume where there is any
- Typical tools
- Charts, trend lines, levels, indicators
- Time it usually suits
- Any, from minutes to years
- Where it fails
- Patterns in past prices need not repeat
- Can it say what happens next?
- No
Fundamental analysis
- The question it asks
- What is it worth, and why?
- What it looks at
- Economic data, interest rates, company accounts
- Typical tools
- The economic calendar, official reports, valuation models
- Time it usually suits
- Weeks to years
- Where it fails
- It can be right about value and wrong about timing for a long while
- Can it say what happens next?
- No
Sentiment analysis
- The question it asks
- What is the crowd thinking and holding?
- What it looks at
- Positioning reports, surveys, option prices
- Typical tools
- Positioning data, volatility measures, surveys
- Time it usually suits
- Often days to weeks
- Where it fails
- It is hard to measure, and a crowd can stay one-sided for a long while
- Can it say what happens next?
- No
How to read this table
Each column is a different question put to the same market, and they are often used together. The last row is the same in all three on purpose. Each method organises what is known; none of them removes the uncertainty about what a price does next.
Each one, in a paragraph
Technical analysis
Technical analysis studies the record of the price itself: its direction, the levels at which it has turned before, how far and how fast it moves. Its tools are the chart, lines drawn on it, and indicators calculated from past prices, such as moving averages. It works the same way on any market and any time frame. Its limit is that it describes what has happened: a pattern that preceded a rise before may precede nothing next time.
Fundamental analysis
Fundamental analysis studies what stands behind a price. For a currency that means interest rates, inflation, growth and the decisions of the central bank; for a share, the company’s earnings and debts; for a commodity, supply and demand. It tries to judge whether a price is high or low against those. It says little about timing: a price can stay far from any estimate of value for a long time, and scheduled news is often already in the price before it is published.
Sentiment analysis
Sentiment analysis studies the participants: how many are positioned for a rise and how many for a fall, and how confident or fearful they appear. Its sources include published positioning figures, such as the weekly Commitments of Traders report from the US Commodity Futures Trading Commission for futures markets, surveys, and the prices of options. It is often read as a warning that a view has become crowded. The measures are partial and late, and a crowded view can go on being right.
Show me two side by side
Choose any two. The rows on which they give different answers are marked; the rest are the same for both.
Technical analysis and Fundamental analysis differ on 5 of 6 rows and give the same answer on 1.
- The question it asksDiffers
Technical analysisWhat has the price done?
Fundamental analysisWhat is it worth, and why?
- What it looks atDiffers
Technical analysisThe history of price, and of volume where there is any
Fundamental analysisEconomic data, interest rates, company accounts
- Typical toolsDiffers
Technical analysisCharts, trend lines, levels, indicators
Fundamental analysisThe economic calendar, official reports, valuation models
- Time it usually suitsDiffers
Technical analysisAny, from minutes to years
Fundamental analysisWeeks to years
- Where it failsDiffers
Technical analysisPatterns in past prices need not repeat
Fundamental analysisIt can be right about value and wrong about timing for a long while
- Can it say what happens next?The same
Technical analysisNo
Fundamental analysisNo
One invented path, three things to look at
A drawing of the mechanism. Choose one of the kinds of analysis beneath it and the sentence says what the drawing shows.
Technical analysis looks at the price alone: here, an average of the path’s own recent values and a level at which it has turned before.
An invented path, an invented estimate of value and an invented gauge. They show what each method looks at, not what any market is doing.
Questions people ask
- What is the difference between technical and fundamental analysis?
- Technical analysis studies the price’s own history, on a chart, and asks what the price has done. Fundamental analysis studies what lies behind the price, such as interest rates, economic data or company earnings, and asks what the thing is worth. The first is about behaviour and timing; the second is about value and cause.
- Which type of analysis is most accurate?
- None of them forecasts reliably, and there is no agreed ranking. Each can describe the past well and each has failed in well-known ways. Many traders use more than one, as different views of the same uncertain thing.
- What is market sentiment?
- The prevailing mood and positioning of the people trading a market: whether most expect a rise or a fall, and how strongly. It is estimated from positioning reports, surveys and option prices, none of which measures it exactly.
The words on this page
A general explanation for study. It is not advice or a recommendation, it does not say which of these to use, and it does not describe the terms of any account.