Fundamental and technical analysis.

When investing goes a little beyond a hobby or an exploratory activity, we need some basis for making decisions, i.e., the need arises to analyze the asset in question in more detail.

To do this there are two main types of analysis, the fundamental and the technical. They differ in the indicators that serve them and allow us to make decisions according to the nature of the investment that we have planned.

Fundamental Analysis

This analysis can take many forms because it results in the combination and reading of macroeconomic indicators to try to measure the real value of our financial assets.

In practical terms, for example, if the objective is to analyze a stock investment, it will be almost instinctive to validate the economic context surrounding the company in question. We would start by learning about its market, industry conditions, the company’s balance sheet report, the company’s current executive and management board, and its management policies. The goal would be to arrive at the intrinsic value of an asset to make a more informed decision.

Let’s also imagine the case of an investment in commodities, where the investment is sensitive to climatic phenomena, catastrophes such as fires or storms that can destroy entire harvests and create a shortage scenario. These eventualities directly influence the supply in the market. Oil is also a good example of another type of limitation, when we recently experienced the influence of the lack of consensus at OPEC meetings that created quite significant volatility in the price of a barrel.

Technical Analysis

Opting for technical analysis is based on studying the evolution or movement of prices. The goal is to draw a forecast for the movement of the asset value by comparing its value in previous periods, thus following a possible pattern. Once a pattern or trend is determined, with the belief that these will continue to repeat themselves, a bet is placed on its behavior in the future.

Thus, the indicators used here refer us to patterns. These will be drawn taking into account the trends to form resistance or support lines, triangle patterns, and their variations, among other less common ones. Besides these, there are possibilities to build patterns defined by the strength and volume of movements, or even by price oscillations.

Conclusion

With these two perspectives of analysis, we thus present the main methods used by investors. These must be appropriate to the type of investment.

When the purpose is a long-term action, the study of the context and economic environment, in which the company is inserted, offers greater and more secure information and this is only possible by following the metrics that we will have available if we direct ourselves to a more focused analysis on the fundamental aspects.

On the other hand, if the objective is trading or short-term movements, the most effective will be to understand the situation at the moment in order to take advantage of it as soon as possible, thus justifying a technical analysis.

At the end of this presentation, we recognize that there may still be advocates for each type of analysis. Therefore, our recommendation is that we should not stick to one type of analysis. A combination of the two is ideal, but obviously, there will be a bias depending on the type of asset and the time horizon of the investment.

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