Technical Analysis vs. Research Analysis
Figure A
Technical Analysis and Research(Fundamental) Analysis are two methodologies investors use to forecast growth trends of stocks, cryptocurrencies, sectors, and much more. There is a never-ending debate about which methodology is better and the truth is there is no definitive answer. In this article, I will share the pros and cons of TA(Technical Analysis) and RA(Research Analysis.) I will also share why Hedge funds, Investment firms, and Financial Institutions hire both to make the best decisions the market may offer.
Content:
General Information-
What is Technical Analysis?
What is Research Analysis?
Additional Information-
So What’s Better?
Why Firms Hire Both Types of Analysts
When TA or RA Goes Wrong
Conclusion
General Information-
1. What is Technical Analysis?
Technical Analysis is a methodology that primarily uses but not limited to data to identify trends and forecast the market direction. An example of Technical Analysis is using oscillators like the RSI to determine the strength of a trend. Below is a graph that shows regular bearish divergence. When price makes a higher high and RSI makes a lower high this means the trend is weakening. As a result, a sell-off may* occur. This is one of many examples that Technical Analysts may use to identify a trend. To recap, Technical Analysts focus on price charts, oscillators, and indicators to forecast the market.
Figure B
2. What is Research Analysis?
Research Analysis is a methodology that primarily uses but is not limited to company analysis, industry analysis, macroeconomic conditions, and future profit outlook. An example of using Research Analysis is one that I shared recently in my "Arweave - $AR, Asset Review." Under the “Network Growth” section, I reviewed the network usage by transactions and storage growth as it indicates whether or not people are interacting with the network. We see that more addresses are being created, which results in more transactions and usage. In this example, it means over time the network will grow which may* eventually drive the demand for $AR token. To recap, Research Analysis is used to identify the growth potential of an asset to determine if it's overvalued or undervalued.
Additional Information-
1. So What’s Better?
The short answer is, none. I have spent five years analyzing markets and have seen multiple examples where both TA and RA did a great job individually. But let me ask you a question. If you were going to start a business(a restaurant) and had great recipes but lacked an understanding of a good location. Would you not seek professional advice on where to open that restaurant? Maybe you wanted to open your restaurant in Location A, but Location B was better because of other factors you were unaware of. What I am trying to get at is that, yes you can be successful using ONE methodology (just like having great recipes.) But it's also good to understand the OTHER (TA or RA) methodology in combination as it will allow you to be more successful (just like also having a great location.) To recap, no one is better than the other but in fact, they are best together even though you may have success using one methodology.
2. Why Firms Hire Both Types of Analysts
In my professional experience, I have noticed that firms always have an edge when investing. When you see how firms are structured, most of the time there is a research arm and a trading arm. The researchers do Research Analysis to determine which assets are overvalued or undervalued. That information is handed down to the traders who use Technical Analysis to find levels to either short or long that specific asset. Lastly, there is usually a committee that finalizes the decision to pull the trigger on that position. That is how and why some firms have been around for so many decades. They are more educated than retail investors and don’t buy things because of media headlines. Firms are ten steps ahead of retail and it’s why they win. They understand both the technical side and research sides of their investments.
3. When TA or RA Goes Wrong
In this section, I will share examples that prove one without the other may be disastrous. (1)In the first photo, you will see the unfortunate collapse of $LUNA. NO indicator would have displayed Luna is going to $.001 after $121. However, with enough research, it’s evident that the collapse was inevitable. Research Analysis would win in this instance. (2)In the second photo, you will see when Tesla announces buying $BTC. However, the market is showing a weakening trend just like figure b, which leads to the selling that follows it. Only a technical analyst could identify that this trend was weakening while a research analyst may think it's a good thing for Bitcoin’s growth but the timing is off. Technical Analysis would win in this instance. Both are great methodologies and can win each other out as displayed.
Conclusion-
Technical Analysis and Research(fundamental) Analysis are great methodologies for forecasting growth. Either may be utilized independently to forecast, but they are best when used together. TA is not better than RA and vice versa. Instead, one should learn about both or collaborate with others to fill that gap. The world is ever-changing and abundant so we should always keep an open perspective when it comes to markets. Sometimes, the best analyst may even forecast incorrectly. The USA has had the longest bull run in its history, equaling a total of 9.5 years and counting. Many analysts(both RA & TA) predicted a crash earlier on the way up and didn’t expect the federal reserve to keep printing more money. In fact, more money was lost anticipating a downturn, than the downturn itself. To close it off, while both methodologies do a great job of forecasting nothing is guaranteed.
