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:
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.
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…