Technical vs fundamental analysis

What is technical analysis?#

Technical analysis works from the chart. The St. Louis Fed defines it as the use of past price behavior and/or other market data, such as volume, to guide trading decisions ^[1]. The CFTC's glossary describes it as forecasting from patterns of price change, rates of change and changes in trading volume, without regard to underlying fundamental factors ^[2].

Typical tools are candlestick charts, support and resistance levels and moving averages. The CFTC adds an important condition in the same entry: technical analysis can work consistently only if the theory that price movements are a random walk is incorrect ^[2]. In other words, it needs patterns in past prices that repeat, and that is exactly what is in dispute.

What is fundamental analysis?#

Fundamental analysis works from the causes. The St. Louis Fed defines it as using economic variables such as interest rates and output growth rates to guide trading decisions ^[1]. The CFTC describes it as the study of the basic, underlying factors that affect supply and demand ^[3]. For a currency that might be interest rates and output growth; for a company it is the business itself.

For a company, the SEC's beginners' guide points to three statements: the balance sheet shows what a company owns and owes at a point in time, the income statement shows revenue over a period, and the cash flow statement reports cash coming in and going out ^[4]. It also warns that no one financial statement tells the complete story ^[4]. From these numbers come ratios such as earnings per share (EPS) and the price-to-earnings (P/E) ratio, which compares the share price with EPS ^[4].

How do the two approaches compare?#

The table sets the two side by side. The last row matters most for a beginner: each approach has its own way of going wrong.

Definitions from the St. Louis Fed and CFTC ^[1] [2]; horizon evidence comes from surveys of professional currency traders and fund managers ^[1].

Who uses which approach, and over what horizon?#

Most of the evidence comes from professional currency markets. A 1992 survey by Taylor and Allen found that 90% of respondents used some form of technical analysis, and a 2001 study by Cheung and Chinn found that 30% of U.S. foreign exchange traders could best be described as technical analysts ^[1]. A New York Fed paper cites survey evidence that 25 to 30 percent of foreign exchange traders base most of their trades on technical signals ^[5].

Horizon is the clearer pattern. Survey evidence shows traders use technical analysis much more than fundamentals at horizons of less than a week, and the same dominance at short horizons holds for fund managers ^[1]. These surveys describe professionals, not retail traders, and they measure what people use, not what makes money.

Does either approach reliably work?#

Not reliably, and not forever. A St. Louis Fed review found that simple technical rules on dollar exchange rates produced about 15 years of positive, risk-adjusted returns in the 1970s and 80s before those returns were extinguished, and that traditional moving-average and filter rules had become unprofitable by the early 1990s ^[1]. On support and resistance, a New York Fed study found currency rates bounced off published levels 60.8% of the time against 56.2% for levels picked at random ^[5]. The paper calls that substantially more often than chance, yet random levels also bounced most of the time ^[5].

Fundamental analysis has its own limits. The SEC reminds readers that no one statement tells the complete story ^[4], and the sources we cite contain no head-to-head test showing that fundamentals beat charts, or the reverse. If someone tells you their method always works, check our page on backtesting pitfalls before you believe them.

How can a beginner use both without fooling themselves?#

1. Match the tool to your horizon

   At horizons under a week, professional surveys found traders use charts much more than fundamentals ^[1]. Know which horizon you are trading before you pick your tools. Our page on trading vs investing explains the difference.

2. Write down why you are in the trade

   One sentence for the reason (fundamental or technical) and one for what would prove it wrong.

3. Set the exit before the entry

   The chart can help you choose a stop level; the fundamentals cannot tell you when the market will agree with you.

4. Size from the loss

   Use a small, fixed amount at risk so that a wrong analysis is survivable.

5. Review results, not stories

   Record each trade and check later whether your reasons held up, not just whether the price moved your way.

Mistakes beginners make with technical and fundamental analysis#

• Treating a pattern as a promise

  In the New York Fed study, published support and resistance levels held more often than random ones, but random levels also held 56.2% of the time ^[5].

• Using one statement or one ratio

  The SEC says no single financial statement tells the complete story ^[4]. A ratio on its own cannot tell you why it is high or low.

• Mixing horizons

  Buying on a long-term story, then panicking at a five-minute chart, gets the worst of both.

• Assuming an old edge still works

  Currency trading rules that paid for years became unprofitable by the early 1990s ^[1].

• Arguing about methods instead of managing risk

  Whichever approach you use, the loss on a wrong call is set by your stop and your size, not by your analysis.

Frequently asked questions#

The bottom line#

Technical analysis reads what the price has done; fundamental analysis reads why it might move. Professionals lean much more on charts at horizons under a week, and the evidence shows past edges can disappear. Pick the approach that fits your horizon, write down what would prove you wrong, and let position size, not conviction, decide how much you can lose. Read the risk disclosure before trading.

Education only. This page is not investment, tax or legal advice. Trading and crypto can lose you money. See our risk disclosure.