Technical Analysis Vs Fundamental Analysis Which Is Better

…YES, I don’t Care about The Fundamentals. I Love Technical Analysis!

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picture of a musician that also understands technical analysis

The majority trading experts tell you to disregard the fundamentals and concentrate on the technical analysis.

Pretty much every trading publication you select is stuffed with a wide variety of strategies that use technical patterns, indicators or combination of both.

Nearly all retail traders can explain the distinctions between the RSI and Stochastic indicators, but would be baffled by the meaning of PMI reports or the IFO survey.

 

Fundamentals are hard.

Yes, they are confusing and often times contradictory.

They require understanding of the context; an understanding of what is going on behind the scenes right now, or what might develop in the future based on today’s economic conditions.

It requires you to follow the Micro, as well as the Macro developments of the particular currency, you trade. The Fundamentals analysis certainly appear less objective than a couple of trend lines or Fibonacci ratios on a chart.

 

I can’t tell you how many times I’ve seen traders get into a trade simply because “…hey man, it looked good on a chart.”

I mean, risk their hard-earned money on a simple Moving Average crossover. And the saddest part of all is, putting on the trade right before the Major news announcement!

You would think, that they’d checked the Calendar for the scheduled news releases, but again “…hey man, who cares? Everything I need to know, is in the charts.”

Photo credit: jamelah via Visual Hunt / CC BY-NC-ND

Be sure to also read:

Are You still Making an Error Trades, even though You have a Trading Plan?

What moves the price?

Only two things, really. Imbalance in Supply/Demand, and the Economic Information; the Macro-picture, and the Micro-releases.

If you believe that your genius new tweak to your ADX settings is the key to your future success, but you have no clue of who Jannet Yellen, or Mario Draghi is, well… I’ve got news for you! You are stepping into the mine field without even knowing it.

Sooner or later, your trading account will suffer a blow from one of their’s “verbal-mines,” as I call them.

In fact, 90% of all retail traders would be much better off if they knew less about technical analysis, but knew more about the weekly scheduled economic events.

Here is some “tough Love” for you my fellow technical analysis junkie:

If you know the difference between the RSI and Stochastic, but can’t tell me who, in Finance world, the above mentioned people are, then you’re a figaro-trader.

If you worship Fibonacci and can defend a thesis on Price Action but have no clue as to what time of the day and what week the Non-Farm payrolls are released, then you’re even a bigger figaro-trader!

boxers in the ring and one of them knows technical analysisPhoto credit: jimbo0307 via Visual hunt / CC BY-NC-SA

Check-out: If You think, you can beat these guys at their own Game…

Conclusion

If you are just watching the price, and not following the news, you are like a  boxer that just stepped into the ring, with one hand, tied behind his back.

Is there any wonder why 90% of retail traders fail to succeed in financial market?

Without any awareness of the Macro-events and the Micro-releases retail traders simply fall prey to more sophisticated and well-informed professional traders.

What Do You Think?

Why 90% of retail traders fail at their craft…

What are the reasons for a failure…

Please leave a comment and let us know.

 

 

…So, What Comes First, the Chicken or the Egg?

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Picture of Chicken and the Egg that explains the technical vs fundamental analysis situation.

Of course the chicken first, the species first, then the egg…

How the heck, this relates to trading? – You may ask.

I’ll answer it with the counter question; Which comes first, Fundamental analysis or Technical?

Wow, wow, hold on now Dave… what do you mean by “…which comes first?”

Ok, let me rephrase the question; when trading the markets, which one you, as a trader, mostly pay attention to: the charts, or the fundamentals? Yeah, this is definitely a loaded question.

If you ask any Technician the very same question, he or she may answer that everything already has been discounted in the price, thus looking for the clues anywhere else, but the charts, is a waste of time and effort.

 

Now, the Fundamental analyst, on the other hand, will give you a completely different answer.

Here is Ralph Seger’s quote “One way to end up with $1 million is to start with $2 million and use technical analysis.”

I don’t completely agree, with Mr. Seger, nevertheless he has his point.

But before I tell you why I disagree, let’s take a look at some of the differences between fundamental and technical analysis.

Let’s take a look at this table:

technical vs fundamental analysis pictorial graph 

                                                                                                                          Source: DailyFx.com

As we can see, Technical Analysis centers around examining a chart information.

There are lots of means of achieving this; some traders using just plain charts and raw price action,

others are employing indicators or complex mathematical systems to place their trades in the present according to price movements of history.

Fundamental Analysis, on the other hand, studies the factors to forecast future price movements.

It is the study of what’s going on in the world (macro-trading) economically, politically and financially speaking.

This particular analysis tends to concentrate on how macroeconomic components such as employment, inflation, interest rates affect whatever we plan to trade.

Monitors with charts, representing technical vs fundamental analysis topic.

 

Which Is Better?

For many years, fundamental analysis had been considered as the only highly regarded method for medium and long term trading among Institutional traders. Which, has changed recently with the introduction of high-speed processing.

Computer modeling and technical studies became much easier and more widely available. Nowadays, numerous large investment companies use black box trading and high frequency trading, to determine their directional entry and exit areas.

Because of this many of the largest market participants are generating their trading decisions from computer algorithms. The truth of the matter, it is estimated that algorithmic speculation represents from 70 and up to 80 percent of the total volume on exchanges these days.

Whether you like it, or not, the markets have changed and nowadays your trades are moving on technical reasons as much as fundamental ones. In my opinion, the best approach to trading should involve the combination of both.

Read related post: Simple Logistics To Be Aware: Forex Fundamental Analysis

Also, read: If You think, you can beat these guys at their own Game…think twice!

Conclusion

The fundamental analysis is considered to be more logical, practical part of trading in which you are looking at Global macro-events as well as everyday economic micro-events.

Technical analysis, on the other hand, can tell us a lot about the psychological mood of the market by analyzing past data to forecast future movements.

In a nutshell,

Technicals help to see what has happened, and Fundamentals help shape future price movements.

What Helps You More in Your Trading?

Please share your opinion, and let us know…