What Is the Difference Between Technical Analysis and Fundamental Analysis?

    There are basically two schools of thought when we talk about market analysis: Technical Analysis and Fundamental Analysis. Let us start with Fundamental Analysis.

    Fundamental Analysis is the study of the fundamentals of the market. "Great," you say, "What are fundamentals?" Fundamentals are all things that affect the supply and demand of the underlying commodity. For example, if you were analyzing the price of wheat and you thought that the price of wheat was going to go up because there is a draught in the mid-western United States, then you would be basing your analysis of the wheat market on fundamentals.

    Technical Analysis, on the other hand, is the study of the market based on a chart of its price data like the one above. If you were to look at the chart of the price of wheat over time and saw that the price of wheat is the lowest it has been in 20 years, then you are said to be using Technical Analysis. You do not need to know anything about the underlying commodity to be a Technical Analyst and that is one of the advantages of being a Technical Analyst. If you wanted to study the fundamentals of Coffee, then you would want to know everything about coffee: how it is grown, what the planting cycles are, who the big buyers of coffee are, what are their plans in the future and how would that affect the demand for coffee and so on. The problem in researching coffee is that it takes a very long time to find out this information and then even more time to examine and interpret it. Technical Analysts claim that all of the fundamentals, or things that affect the price of a commodity, are shown on the price chart anyway. This actually makes sense if we think about in terms of the laws of supply and demand: if the supply of coffee goes up and the demand stays the same then the price will go down. This supply and demand relationship can be seen as a price drop on a price chart.

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