Technical or Fundamental Analysis, by Omar Eltoukhy
The argument between Technical or Fundamental analysis is as old as trading itself.
It is one of those epic arguments, with most traders relying on one or the other, and vehemently defending their position for doing so.
Before we get to the answer of which one is actually more useful in trading, some of you may not even be aware of the difference. Let’s review:
Technical Analysis: The ability to determine trading strategy based on chart information alone. This includes price action, support and resistance, indicators, oscillators and fibonacci. Anything that can be plotted within a chart and read from a chart falls into this category. A trader attempts to reason based on what buyers and sellers have done from information reflected in their actions which appear on a trading chart. For example, horizontal support and resistance is a very popular tool in determining “areas of interest” where price may react in the future. It is determined by looking back through historical information to locate price levels that market participants have caused there to be a reaction from. The theory goes that if it has been important before, when price hits that level in the future, it will react, slow down, break through or reverse at that area. Now there is nothing particularly important about the number other than other traders use it. It is reflective of decisions made by those very same traders. This is true of any type of technical analysis. Technical indicators are merely a reflection of trading decisions and do not DRIVE the market.
Fundamental Analysis: The ability to determine trading strategy from policy decisions, news, interest rates and statements made by central bank presidents. Fundamental analysis looks at the DRIVING FORCE behind the moves in the market, AKA the decisions made by the powers that be to change the very essence of value within a given trading instrument. Traders from this camp look to understand what bigger influences changes in approach by politicians, central bankers, and sovereign nations. For example, an interest rate policy change will effect a currency price’s value depending on if it is raised or lowered. Fundamental traders attempt to capture the resulting moves from the change in interest rates by being on the lookout for the earliest possible suggestions by central bank presidents and board members.
So what’s the big fuss?? Well because most traders really believe that they can trade successfully by only using one approach. Technical traders are staunch in their “see the move, trade the move” approach while fundamental traders look at it as “understand the move, trade the move”. While it is true that either approach can be very time consuming on its own, I personally don’t understand why people have gotten absolutely so stuck in only doing one at a time.
Yes, while it is true that you can very much understand price action, and what may happen in the future through technical means, it leaves you in the dark about the true driving force of what is going on, and that could be very actionable in keeping you in a trade, or finding some alternative means to trade if your particular instrument is not tradeable within a given timeframe. It leaves out the command of many options and forces you to focus very narrowly.
On the other hand, while fundamental analysis does an excellent job of the driving forces behind market movement, it does an extremely poor job of the “WHEN” things will happen. Using a purely fundamental approach forces a trader to only long-term trading, since pinpointing an entry with precision is nearly impossible only understanding the biggest picture of market forces. You may understand what should happen, but as the famous saying goes “the market can stay irrational longer than you can stay solvent”, and having an idea of exactly when the best time to trade your particular anticipated move can really allow you to make the most of it.
In the end, the “ideal” approach in trading is a marriage between the two: Understanding the framework and “bigger picture” through fundamental analysis to determine what to trade, best ideas, driving forces, etc… while actually doing the trading through technical analysis to give you a level of precision that is most profitable. The problem is, there is no formal education out there to do accomplish this. Or at least there wasn’t until I met Fotis Papatheofanous and he joined up with Marc to really create something powerful in their pro trading course. It solves the age old problem of “Technical VS Fundamental Analysis” and which one is more effective or better. The time I have spent in the meetings where these guys hammer down that perfect blend of fundamental framework followed by accurate, pinpoint technical analysis that leads to profitable, actionable trading information. More on this later.
Just remember that the next time you hear a Technical VS Fundamental Analysis debate, you can step in and say “you’re both wrong……and also both right!!” It just takes they synergy of the two together to really make you a powerful trader.
Technical Or Fundamental Analysis