Functional analysis and technical analysis are recognized methods of quantitative evaluation in business and finance. Though each seeks to derive subtle variables conducive to decision-making, functional and technical analysis differ in the way they approach a problem. Functional analysis focuses on the operation of a discrete system and maximizing its performance. By contrast, technical analysis is used to forecast market-driven variables such as prices and rates.
As the name suggests, functional analysis dismantles a system with a productive purpose in order to define the variable functions that contribute to its operation. Functional analysis is frequently used for solving problems in a company. Once an analyst has determined a system's principal functions, she solves the problem in question by investigating the sub-functions comprised in those functions until she derives the cause or causes.
Simple Example of Functional Analysis
Suppose Company XYZ has been experiencing slow productivity for a number of months. A functional analyst first derives Company XYZ's basic functional components: production, advertising, human resources and accounting. The analyst might then investigate the sub-functions of production and determines its components to be labor, machinery and raw materials. He may then continue to examine such sub-functions as the productive roles of employees and the role of each machine until he encounters the issue or issues resulting in low productivity.
Technical analysis is a method for forecasting the price movements of any given market-traded asset. Using time-series charts that show the changes in the price of an asset, technical analysis predicts the direction of forthcoming prices by matching graphic patterns in the chart with similar price patterns that have historically indicated a definite future price change up or down. For this reason, technical analysis plays an important role in the trading of stocks and other assets such as foreign currency.
Simple Example of Technical Analysis
Suppose a day trader needs to make a decision about whether to or not to buy shares of stock XYZ. Using technical analysis, the trader reviews a time-series chart of XYZ's market prices during the past seven days. If the pattern of the chart suggests an imminent rise in the price of XYZ, then the trader will buy shares. If the pattern of the chart instead suggests that XYZ will experience a further price decline, then the trader will not buy shares until the chart indicates that XYZ's price has reached its lowest level.
Nicholas B. Sisson holds a B.A. in economics from Ithaca College and a certificate in technical communication from J.B.S. Technical Communications, Ltd. Working in investment operations, Sisson participated in an initiative to revise and rewrite his group's procedure manual. More recently, Sisson created definitions of financial terms for the glossary of a major financial website. He has been writing since 2008.