Technical Versus Fundamental Analysis
echnical analysis and fundamental analysis are both two sides of the same coin. Their aim is to analyse current factors in the market in order to speculate on future market direction. Technical analysis is the practice of analyzing historical price patterns on a chart and expecting these patterns to continue into the future. You can read some more on technical analysis in this post I previously wrote. Fundamental analysis on the other hand is a way of forecasting future price moves by analyzing all the news in the market that is effecting supply and demand issues. So for example if you were trading bonds you would be looking at what current market expectations are for future interest rate policy. Or in the oil market you might be looking at whether there are any supply disruptions in the middle east.
Regarding which is better, technical analysis or fundamental analysis i would say they both have to be considered to maximize your trading potential. However, for a new market participant looking to learn the markets i would say it is best to start off by focusing on technical analysis.
There is an economics theory that all fundamental information is already priced in to the market and therefore there is no edge in going to through the long process of gathering all the current fundamental news. There is some truth in this. However there is still huge edge to be had by knowing why your market is moving. The way i use this is to work out whether i believe the news currently moving the market is a headline that will have a short term effect on the market. Or a major underlying theme that is likely to drive the market for some time. If this is the case i will take all my trades with this theme in mind. So if we went into an unexpected recession, this would be a major market event that would likely cause equity markets to be weak for some time so would cause me to trade with a sell bias.
On the other hand technical analysis would still cause you to be selling the market (using the above recession example) because you would see on a price chart that the market was falling in price and you could speculate on further moves lower without even knowing why these moves were happening. But, the reason why being aware of both forms of analysis is that by knowing why markets were falling it would give you confidence to hold your sell positions, or short positions as they are referred to.
Fundamental analysis has its weaknesses. Generally market prices will always move in accordance with what fundamental analysis is telling you. However, they don’t always move immediately. For example, if there was a new war in the Middle East this would cause oil to move up. But when would it start to move up? Would it be on the day the war is announced? In the weeks leading up to the war? Or maybe several days after it starts and we find out how much the oil supplies have been disrupted .All these different scenarios mean there is a chance you could enter the trade too early or too late causing losses. However, having a clear technical approach based on a market pattern you have seen before would result it a far more timely entry thus reducing risk.