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Technical, fundamental and quantitative analysis are three of the most widely used methods for evaluating the financial markets. Understanding how they work, as well as their advantages and disadvantages, can help investors to make decisions relating to their overall investment goals. Learn about each of the different analysis types and how they are used by traders.


There are many ways of analysing the financial markets. Whether you are looking to invest in stocks, commodities, forex or crypto, you can implement a variety of strategies to assess market conditions and decide whether it’s the right time to buy or sell an asset

Technical, fundamental and quantitative analysis are three of the most popular ways to size up the financial markets. They can be used separately or in conjunction with each other, but how do they work?

What is technical analysis and how is it used by traders?


Technical analysis involves analysing historical market data and price charts to help determine trading decisions. It is a widely popular strategy, with some traders basing their entire decision-making process on technical analysis, while others will use it in combination with other forms of analysis.

Price history and trade volume data are the main building blocks of technical analysis. Investors will attempt to interpret this data on a price chart using charting techniques, or will apply formulas to the data to create technical indicators.

The overall aim of technical analysis is to understand what happened in the past, in an attempt to predict what might happen in the future.

Technical Analysis
Pros
  • Markets have been proven to form repeatable patterns.
  • It can present short-term trading opportunities.
  • It is a widely used, sometimes self-fulfilling method of analysis.
Cons
  • History doesn’t always repeat itself.
  • It can be difficult to select the best indicator to use.
  • It is always possible for false signals to be created.

What is fundamental analysis and how is it used by traders?


Fundamental analysis is used to measure an asset’s intrinsic value by looking at related financial and economic indicators. This can include macroeconomic factors, such as interest rates, inflation rates and industry-specific conditions, or microeconomic factors, such as changes to the company’s management structure.

Traders use fundamental analysis to find stocks that are undervalued or overvalued compared to their fair market value. For example, if an asset’s current price is higher than its fair market value, then it could be worth entering into a short position. On the other hand, if the fair market value is higher than the price of the asset, fundamental analysts might consider opening a long position.

Fundamental Analysis
Pros
  • It can be a good fit for long-term investment strategies.
  • Information is easily accessible.
  • It considers a wide range of factors.
Cons
  • It can be time-consuming.
  • It’s not an ideal strategy for predicting short-term price moves.
  • It is a subjective strategy.

What is quantitative analysis and how is it used by traders?


Quantitative analysis is another approach used to determine whether to buy, sell or hold an asset. This strategy processes market data through mathematical and statistical models to give analysts a numerical interpretation of market elements. 

Quantitative analysis draws on a wider data set than that used by technical analysis. For example, stock traders using quantitative analysis might include information found on a company’s balance sheet, or they might utilise macro data, such as historical interest rates. 

Quantitative analysis can appear intimidating, which is why institutional investment firms often employ teams of “quants” to carry out high-end research. However, it doesn’t always have to be that time-consuming or complex

Quantitative Analysis
Pros
  • It incorporates a wide range of data sources.
  • It presents a lot of information in a single number.
  • It is a 100% objective strategy.
Cons
  • It can be complex and time-consuming.
  • It relies on data being accurate and appropriate.
  • It can be inaccurate when faced with market randomness.

Tip: The P/E ratio is a widely used quantitative indicator that incorporates data from an exchange (the price of a stock) with data from a company filing (earnings per share).

Comparing technical, fundamental & quantitative analysis


Traders and investors will often debate the merits of the three approaches. Fundamental analysis captures qualitative factors, such as a company’s culture or ESG policy, whereas the other two approaches are entirely data driven. Of course, there are positives and negatives attached to decision-making based entirely on numbers.

Deciding which type of analysis to use will often be based on investment objectives. Traders using short-term strategies tend to favour technical analysis, whereas buy-and-hold investors with longer investment time horizons are often more reliant on fundamental analysis. The flexibility of quantitative analysis methods means that they sit somewhere in the middle.

Method of AnalysisShould be used if:
Technical AnalysisYou want to make short-term investmentsYou believe that the price of an asset is all-encompassing and reflects both intrinsic and extrinsic factors
Fundamental AnalysisYou want to make long-term investments based on an asset’s intrinsic valueYou believe the asset and its core qualities determine its value
Quantitative AnalysisYou want to use numbers to bring greater objectivity into your trading decisionsYou believe that making more moves with a positive expectation is the best way to trade

Tip: Technical, fundamental and quantitative analysis can be used in all markets, and applied to strategies with short-, medium- and long-term time horizons.

Combining different types of financial analysis


Conducting thorough research is a crucial part of trading. Instead of dismissing any one approach, many experienced traders and investors will incorporate elements of all three analysis types when making a trading decision.

“The business schools reward difficult complex behaviour more than simple behaviour, but simple behaviour is more effective.”

Warren Buffett

Technical and Fundamental Analysis

You can use fundamental analysis methods, such as economic calendars, to anticipate upcoming announcements. Some day traders may even close all positions in the run-up to an important news event and re-enter positions to trade the resulting price moves, in an attempt to limit risk.

Quantitative and Fundamental Analysis


You can combine quantitative and fundamental analysis by using the latter to offer an additional insight to number-based research. The quantitative method is completely objective and provides a clear starting point, but an additional layer of subjective interpretation can provide a fuller picture.

Technical and Quantitative Analysis


Technical analysis is typically more user-friendly than quantitative analysis. It can come down to studying a price chart and simply establishing if the price action is bullish or bearish. However, this can allow a degree of subjectivity to creep into trading decisions. Quantitative analysis can be used as a way of double-checking technical analysis trade indicators, to ensure they’re as strong as your technical analysis suggests.

Tip: Experienced investors will often use fundamental and quantitative analysis to determine the price direction of an asset, and technical analysis to pinpoint the best time to execute a trade.

Final thoughts


Technical, fundamental and quantitative analysis set out to do the same thing: identify trading opportunities. Investors should establish which method they are naturally drawn to, and which is right for any given moment in time. Each approach has its strengths and weaknesses, and so using them together can lead to a more rounded approach to investing. Remember, there is no guarantee that the price of an asset will respond in the way that your analysis suggests, so do not invest more than you’re willing to lose.

Visit the eToro Academy to learn more about different types of market analysis.

FAQs

Is it difficult to learn quantitative analysis?

The scope of quantitative analysis is huge, but it isn’t hard to gain a basic understanding. Thankfully, a wide range of quantitative tools are provided by online brokers, removing the need for users to build their own models.

What are the limitations of technical analysis?

Technical analysis involves applying the right indicator or metric to current market conditions. Unlike quantitative and fundamental analysis, technical analysis relies solely on past events, and what works today may not work tomorrow.

What are the major challenges facing analysts?

The major problem facing all analysts is the quality of the data they use. Whether you are applying quantitative, technical or fundamental analysis to your trading, the information you base your decision on must be robust, accurate and appropriate. 

This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.

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