DEBERE MARKOS UNIVERSITY

COLLEGE OF BUSINESS AND

ECONOMICS
DEPARTMENT OF ACCOUNTING AND
FINANCE (PG EXTENTION)

INVESTMENT ANALYISIS AND PORTFOLIO

MANAGMENT (ACFN.613)

 WHICH TYPES OF ANALYSIS DO INVESTMENT

ADVISOR AND WRITERS RECOMMEND FOR
INVESTORS?

 ADVANTAGES OF TECHNICAL ANALYSIS OVER

FUNDAMENTAL ANALYSIS

BY

YITAGESU WONDACHEW…..ID.No-DMU1402811

SUBMITTED TO:DEGU KEFALE (A.PROFESSOR)

July, 2022

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 Fundamental and technical analysis:
Technical analysis is more practical as it studies the markets and financial instruments as they
exist, even if trading activity appears, at times, to be irrational Fundamental and technical
analysis are the two different bodies of literature, which help investors to take an informed
investment decision. They help investors to take a call whether to buy, hold or sell an asset
which could be a share or commodity or any type of asset which is traded in a regulated market.
But both the disciplines are different from each other in terms of approach, assumptions and
applications. Let us discuss which is best suited for investors. Fundamental analysis is more
theoretical as it seeks to determine the underlying long-term value of a security.

Fundamental analysis

Fundamental analysis is an approach towards stock selection based on economy, industry and
company and it is often called as top down approach. By this approach, an investor can identify
the intrinsic value or true worth of a share. Accordingly, if the current market price of the asset is
less than the intrinsic value or true worth, one should buy the same and vice versa.
One of the major assumptions of fundamental analysis that the price in the stock market does not
fully reflects a share’s real value owing to information asymmetry. To become a fundamental
analyst, one needs to have good understanding of basic economics; understand the businesses
model especially with respect to the industry in which it operates; understand the basic financial
statements especially how the cash flow is generated for the business and other allied aspects. P
Saravanan (July 30, 2019 )

As we study in investment analysis and portfolio management (AFCN613) class fundamental

analysis involves making investment decision based on the examination of the Economy, market,
industry, and company variables that lead to an estimate of value for an investment, which is
then compared to the prevailing market price of the investment. And also fundamental analysts
study everything from the overall economy and industry conditions to the financial condition and
management of companies.

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Technical analysis

It is a separate branch of study which is very different from fundamental analysis. It assumes and
operates on a simple principle that price discounts everything. It means that all of the factors
considered by a fundamental analyst are reflected in the price of a financial instrument through
buying and selling activity. Accordingly, supply and demand determine prices; changes in supply
and demand cause changes in prices; prices can be projected with charts and other technical
tools. P Saravanan (July 30, 2019 )

Key Differences between Technical and Fundamental Analysis

The technical studies the effect of supply and demand (price and volume), while the
fundamentalist studies the causes of price movements (such as rising interest rates.) Studying the
fundamentals may give an investor a sense of long-term price prospects whereas technical
analysis plays a role in deciding when and at what level to enter or leave a market.

Which one is best?

Technical analysis approach derives the value, solely from price and volume data generated from
the market. But, fundamental equity approach arrives at the intrinsic value differently. It predicts
security price movements, by analysing various economic, industry and company data and
incorporates data that are external to the market. A key distinction between technical analysis
and fundamental analysis is that the technical analysis uses more concrete and actual data,
primarily price and volume data.

The financial statements analyses under fundamental analysis are not objective data but are the
result of numerous estimates and assumptions that have been added together to arrive at the line
items in the financial statements. Fundamental analysis is more theoretical because it seeks to
determine the underlying long-term value of a security. Technical analysis can be considered to
be the more practical because it studies the markets and financial instruments as they exist, even
if trading activity appears, at times, to be irrational.

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To conclude, fundamental and technical analysis are both useful and valid, but they approach the
market in different ways. You can use any one of the above or both as long as you are making
money. (The writer is associate professor of finance & accounting, IIM Shillong)

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Advantages of technical analysis over fundamental analysis

The benefits of technical analysis

When analyzing the chart, you place more importance on herd psychology (the market) than
on the valuation of a publicly traded company. In fact, this is one of the advantages of
technical analysis. To properly read the chart, you don't need to have any particular
knowledge of economics, finance or accounting. Indeed, this type of analysis ignores
fundamental data and focuses your attention on fluctuations in the share price as well as on
trading volume. Understanding and applying technical analysis has nothing to do with your
ability to assess a company's financial health.

Another advantage of interpreting charts is that this practice allows you to identify buy and
sell signals in order to improve the timing when you take positions. Technical analysis can
be more effective than fundamental analysis in determining the best time to buy or sell a
stock. For example, using different financial ratios, fundamental analysis can help you
determine whether a publicly traded company is undervalued or overvalued by the market.
On the other hand, reading this accounting data does not really allow you to anticipate
where the share price is headed over the short term. 

Technical analysis is not a crystal ball

There aren't actually any secrets behind studying charts. Technical indicators such as
MACD, RSI and the stochastic process only use mathematical formulas to display data that
you can interpret as signals. In addition, all lagging indicators provide buy or sell signals
with a certain delay in relation to actual price changes. In such a case, you can infer that
they serve more to confirm a movement rather than to predict it. 

Figures used by chart specialists such as the "ascending triangle" or the "double top" are
figures that appear within a chart and are a visual representation of the phenomenon of
pressure on buyers or sellers. These figures recognized by traders also work, in part, due to
the phenomenon of self-fulfilling prophecies. In other words, if there are a large number of

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investors who position themselves based on charts from these specialists, these same people
have an influence on the price and can make the expected result come true.

As you can imagine, there is no algorithm that allows you to use the past to predict future
movements in the share price with certainty. This is why technical analysis is not infallible
and it is important to be aware of its limitations. Basically, it is still possible that, even if all
indicators converge to provide you with buy signals, the share price could continue to fall.  

Technical analysis

 is the study of stocks and markets as they relate to price data only. Technical analysis does not
concern itself with the researching of the fundamental information and prognosis--that’s left for
fundamental analysis. Fundamental and technical analyses are somewhat at odds with each other.
Some market experts use both, and some use one or the other. The main benefits of technical
analysis are that it takes less time than fundamental analysis, can easily take advantage of useful
resources, is inexpensive to employ and focuses more on strategy and execution.

1. Takes Less Time

Proponents of technical analysis believe that all the information and research is already priced
into the markets. One can speculate faster with charts and price data. Just by looking at the charts
and by having technical expertise, someone using technical analysis would benefit from sticking
to studying the charts and data. That means that less time is spent on irrelevant information and
more time is spent becoming familiar with the price movements of the market in question.

This also means that more time is spent focusing on execution and ultimately focusing on profits
and managing losses. That’s why most traders use technical analysis, while most investors use
fundamental analysis. Technical analysis focuses on the execution of the trade as well as profit
and losses in the near term, whereas fundamental analysis focuses on value and long-term
potential.

2. Ready Resources

Charting involves being resourceful. There is an abundance of technical indicators available in

many trading and charting packages that can lead to good analysis and strategies. Much research

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has gone into many technical indicators that are included in trading software and packages that
afford the everyday trader built in resources and a wealth of information. This allows anybody
and everybody to learn to plan a strategy without having to create her own methodology, which
can cost a lot of time and money.

3. Inexpensive

These technical indicators and software packages are relatively inexpensive. They can be
managed by one person and used to a desired end for the further analysis and creation of
strategies. Because they are so inexpensive, the barrier to enter into day trading with technical
analysis is low, allowing dedicated individuals to engage with and succeed in investing and
trading. Thanks to the aforementioned benefits and economics of technical analysis, one’s own
character is the driving force for success in trading.

4. Strategic

Technical analysis is a precursor to building a good strategy. Thanks to the aforementioned

benefits, technical analysis focuses the trader on the execution of a strategy that is suitable for his
or her trading style. There are as many strategies as there are traders. One’s own creativity and
perseverance are the only limitations. This strategic focus allows for better success from a
strategic standpoint. For instance, instead of just researching the news revelations and
fundamental information, traders can know systematically and strategically how to place their
trades and when to close a position. This is by far one of the most important aspects to technical
analysis. 

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Conclusion

In conclusion, technical analysis allows you to act according to price changes and take
advantage of strong fluctuations by recognizing trends, price levels and figures. The main
advantage of studying charts is that they can help you better determine at what price it might
be wise to open or close a position.  Remember, however, that this type of analysis has its
limitations and is not always 100% effective. In the end, do-it-yourself investors can always
use a combination of fundamental and technical analysis before making the decision to buy
or sell a security. Alexandre. D.(2013.360 Inc.).

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REFERENCE

 Alexandre Demers(2013) has been an active investor since 2013 and is the founder
and president of Traders 360 Inc.
 IIM Shillong.The writer is associate professor of finance & accounting,
 P .Saravanan (July 30, 2019 )
 Investment analysis and portfolio management (AFCN.613)