In the investment world, every decision counts. Successful investors do not rely on chance, but on well-founded tactics. This is where two key approaches come into play: technical analysis and fundamental analysis. Both are used to evaluate assets and make informed decisions, but which one is best for you? How do they differ? Don’t worry about answering these questions, because, in this article, we will explore in detail how they work, their differences and how they can complement your investment strategy. Read on and find out which one best suits your investor profile!
What is technical analysis?
Let’s start by defining what technical analysis is. This is a method that studies the price action of an asset in the market using charts and historical patterns. It is based on the idea that the price of an asset reflects all relevant information and that patterns of behavior repeat over time.
Main tools of technical analysis
Price charts
They are the basis of technical analysis and allow to visualize the historical behavior of an asset. Among the most commonly used are:
Line chart: Represents the closing price of an asset over a period of time. It is useful for identifying general trends.
Bar chart: Shows the opening, closing, high and low for each period, providing more information about the asset’s volatility.
Technical indicators
These are mathematical calculations applied to the price and volume of an asset. Some of the most popular include:
Moving averages: They smooth the price action to identify the main trend. Simple (SMA) and exponential (EMA) are used.
Relative Strength Index (RSI): Measures the speed and change of price movements to identify overbought or oversold.
MACD (Moving Average Convergence Divergence): An indicator that helps detect changes in the strength, direction and duration of a trend.
Price patterns
They are figures that form on charts and can indicate continuity or change of trend. Some of the most commonly used are:
Double top and double bottom: Signs of trend exhaustion and possible changes in direction.
Triangles and flags: Consolidation patterns that can anticipate the continuation of the trend.
Support and resistance
Support: Price level at which demand is strong enough to prevent the price from falling further.
Resistance: Level at which supply exceeds demand and prevents the price from rising further.
These levels are fundamental for making entry and exit decisions in the market.
Volume of operations
It is a key indicator for confirming trends and price movements. High volume on a break of resistance or support indicates a higher probability that the move is valid. Low volume may indicate a false signal of a trend change.
Applied technical analysis.
Imagine you are analyzing Grupo Bimbo shares on the Mexican Stock Exchange. A technical investor reviews its price chart and notices that it has formed an ascending triangle pattern, suggesting a possible breakout to the upside. In addition, the Relative Strength Index (RSI) shows a value of 65, near overbought, indicating that there could be selling pressure in the short term. Based on these indicators, the investor decides to buy if the price breaks resistance.
What is fundamental analysis?
On the other hand, fundamental analysis helps us evaluate the intrinsic value of a financial asset by studying economic, financial and corporate factors. Its objective is to determine whether a stock or asset is overvalued or undervalued in the market.
Main tools of fundamental analysis
Financial statements
Financial statements are the basis for fundamental analysis. Among the most important are:
Income statement: Shows the company’s revenues, costs and profits for a specific period. It allows the evaluation of profitability.
Balance sheet: Presents the company’s assets, liabilities and stockholders’ equity, which helps to determine its financial stability.
Cash flow statement: Indicates the movement of money in the company, differentiating between operations, investment and financing.
Financial ratios
They allow companies to be compared and their performance in different aspects to be evaluated:
PER (Price to Earnings Ratio): Ratio between share price and earnings per share. A high PER can indicate growth expectations, but also overvaluation.
ROE (Return on Equity): Measures profitability as a function of shareholders’ equity. A high ROE suggests an efficient company.
Profit margin: Represents what percentage of revenue is converted to net income.
Revenue and earnings growth
A company’s growth history is analyzed to determine whether it maintains a positive trend in revenues and profits. This gives clues as to its stability and growth potential.
Sector and competition
Comparing a company with others in its industry allows you to assess its positioning and competitiveness. Factors such as market share, barriers to entry and industry trends can influence its performance.
Applied fundamental analysis.
Think of yourself as a fundamental investor and you analyze América Móvil (AMX). First, you review its financial statement and notice that it reported 10% revenue growth in the last quarter. Then, you compare the Price/Utility (P/U) with that of other companies in the telecommunications sector in Mexico and note that AMX has a P/U of 12, while its competitors are at 16, indicating that it may be undervalued. In addition, you consider the company’s growth in Latin America and decide to invest, expecting the value to increase in the long term.
3. Key differences between technical analysis and fundamental analysis
Technical Analysis
- Focus: Price movements and historical patterns.
- Time horizon: Short and medium term.
- Tools: Charts, technical indicators.
- Type of investor: Traders and speculators.
Fundamental Analysis
- Approach: Intrinsic value based on economic fundamentals.
- Time horizon: Medium and long term.
- Tools: Financial statements, economic indicators.
- Investor type: Long-term investors.
4. Advantages and disadvantages of each method
Advantages of technical analysis
- Allows quick decisions to be made.
- Identifies trends and entry/exit points.
- It can be applied to any type of market (stocks, forex, cryptocurrencies, etc.).
Disadvantages of technical analysis
- It does not consider economic or fundamental factors.
- It can generate many false signals in volatile markets.
Advantages of fundamental analysis
- Provides a complete view of the company or asset.
- Ideal for long-term investment strategies.
- Helps identify undervalued opportunities.
Disadvantages of fundamental analysis
- It does not predict short-term movements.
- It can be affected by unforeseen external factors.
5. What is the best strategy?
In reality, there is no single answer. Both approaches can complement each other to improve investment decisions. For example, an investor can use fundamental analysis to identify solid stocks and then apply technical analysis to find the best time to buy or sell.
Technical Analysis and Fundamental Analysis.
Both technical analysis and fundamental analysis have their advantages and disadvantages. The key is to understand which one best suits your investment style and financial objectives. If you are looking for better results, the ideal is to combine both approaches and back your decisions with the support of market experts.
At Algo Global, we have a team of specialists who can help you optimize your investment strategies and make informed decisions in the market. Contact us today and take your investments to the next level!
