What Are Fundamental Analysis And Technical Analysis?

December 18, 2010 | By | Reply More

Markets never go straight up or down, they zigzag but still follow the trend. In a bull market there will be mainly higher lows and higher highs, while lower highs and lower lows will signal a bear market. A succession of similar highs and lows indicates the market is  trending sideways and awaiting a breakout to the upside or downside. That is until a major trend reversal takes place. The time frame for a trend varies with the traders particular preference. A long term investor may look at the trend over a five year period whereas a day trader will be looking at the trend by the hour or even less.

Price action is a result of a combination of analysing news and past performance.
Stock, commodity and foreign exchange (forex) traders who favour news driven moves in price, study  fundamental analysis. Simply put it is International, national and local news and news specific to the stock, currency, commodity or other tradeable that they will analyse to determine, in their own opinion, any moves in direction, duration or extent of any price move.

Their counterpart is the study of past performance of tradeables in the expectation that history will repeat itself. The use of charts to plot past price movements overlaid with a large variety of indicators to show trends, price resistance and support levels, moving averages, momentum, trading volume and much more analysed over many years or a matter of minutes  together with the ability to recognise chart patterns that have historically led, in the majority of scenarios, to a change or continuation of price movements, commonly called trends.

Fundamental and technical trading are interlocked. To rely on being, for example, solely a fundamental or news driven trader without consideration for the technical aspects of a trade before taking a position is unwise just as it would be in the reverse situation.

Both disciplines require a high degree of knowledge coupled with the time to recognise and analyse the stream of information over time periods from years to hours, even minutes.

Even the most dedicated movers and shakers in world markets are rarely expert in both technical and fundamental analysis and will favour only one with some general knowledge of the other coupled with some favourite indicators such as, for example, trend line break thrus, converging 50 & 200 day simple moving averages, Fibonacci retracements, etc.

However all professional traders are aware of the importance of algorithmic trading, aka automated trading, algo trading, robo trading or black box trading. This is the use of computer programs, most based on targets originating from technical analysis that will automatically generate buy or sell orders without any human input and irrespective  of any fundamental information that may come into the picture.

Users of automated trading include pension, hedge and mutual funds and other institutions with approximately half of all US stock market trades emanating from these sources.  It is obvious that the importance of a knowledge of technical trading can open the door, however slightly, to the mindset of some of the largest fund managers in the market place.

There are innumerable books on technical trading, we recommend going to Amazon and searching through their titles. Start simple and if you get really hooked, and make no mistake, it can become a fascinating as well as profitable hobby, you can move on once you get a grasp of the basics.

We recommend that you familiarise yourself with Japanese Candlestick Charting Techniques, Second Edition as one of your starters as this ancient Japanese system is relatively easy to understand and to recognise the various buy, sell, trend change, etc. signals before getting into the more complicated stuff.

Another favourite of ours that we still refer to on occasion as a refresher and gets straight to the point is a short paperback entitled 7 Chart Patterns That Consistently Make Money

Regular readers will know that we have declared on occasion of our distrust of technical analysis in its context as a sole arbiter of our trades except in short term speculative plays. This is mainly due to our personal perception of the drivers of gold, silver and PGMs where we believe that the past five years and into at least the next 2/3 years precious metal prices will react to the massive cocktail of ever-changing worldwide fundamentals and bear little relationship with the historical price patterns originating in this specialist market.

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