Technical Analysis Or Fundamental Analysis -- Which One is For You?
Technical Analysis Or Fundamental Analysis -- Which One is For You? What is the goal of most traders? Isn't it to buy low and sell high (going long), or sell high and buy back low (going short)? If traders could always forecast the direction that the Market would go, everyone would easily be profitable. But, as seasoned traders will tell you...forecasting Market direction is anything but easy. While always being able to identify highs and lows is just about impossible, nevertheless, most traders believe they can make "highly probable guesses" using two methods of price forecast: Fundamental Analysis or Technical Analysis.
Traders who rely on Fundamental Analysis forecast Market direction by identifying the geo/political environmental variables. They trade when the variables produce price change. As can be seen, earthquakes, tsunamis, government overthrows can influence Market actions. Add to that new regulations, tightening of monetary policy, etc, and the supply and demand chains are all affected. Economic instability and natural disasters directly cause fluctuation in the price of stocks, currencies, commodities, and indexes. These factors are known as fundamentals. Additionally, concerns about commodity prices, which sector, executive management, these are all taken into consideration as well. Let's say that you trade the stock, GE. Ge reports its quarterly results, beating its estimates. The value of the stock soars. It's like the old adage..."Buy the rumor, sell the news". Fundamental analysts live for news alerts.
Fundamental analysts overall have sufficient financial resources to buy/hold/sell, with the operative word being "hold," the ablility to wait for their investment to appreciate. But there are traders who want to take advantage of price changes that happen all day long. These traders are not happy waiting for fundmental news reports or interest rate fluctuations that may only happen once in a while. These traders are technical analysts.
Technical Analysis is the art, or skill, of forecasting price changes based on an examination of previous price activity. Like stock price movements, technical analysis can not result in 100% future predictions. Instead, technical analysis assists investors anticipate "highly probable" price change. Fundamental Analysts use news, interest rate changes, geo/political activity to predict price change. Technical Analysts uses a wide variety of charts to make the same prediction.
Technical analysis relies on chart formations and mathematical patterns, known as "technical indicators." There are chart formations that predict change in the price trend, from rising to falling or vice versa. There are other technical indicators that suggest price will break out of being consolidated (sideways movement). There are even contrarian price patterns, where the price was trending and then reverses direction. If you put an entire series of technical indicators together you have a complete trading system with overall trading strategies.
Technical indicators based purely on mathematics, like Moving Averages and MACD, are also used to identify the likelihood of price reversal, or the continuance of the current price trend creating computer-generated buy and sell signals. The set of technical analysis indicators is abundant, and they continue to be developed as traders discover new chart patterns. Helping advance the use of technical indicators are high speed computers. Now, more than ever before, technical analysts can forecast price changes with neuro networks and high frequency robots doing massive calculations, something that was never attainable before.
Perhaps one of the biggest advantages of technical analysis is its replicability, repeating mathematical indicator calculations again and again. Most trading strategies only require historical price , volume, over time. Many indicators are automatically included with charting subscriptions for online trading platforms. Technical analysts who watch the same instruments day in and day out, are accustomed to seeing specific chart patterns for their instruments and know what the highly probable price movement for the instrument is.
Regardless of whether you consider yourself to be a fundamental analyst or a technical analyst, remember, it is still just forecasting. There is no holy grail, no 100% positive trading, etc. Losses are part of the game. If you owned a restaurant, when you first opened, you would have many variables to figure out -- menu, amount of food to cook, how many employees you need, etc. The overhead is high, and many restaurants fail before they can figure it out. But if you could survive the first few months, then you will know which menu to use, how many staff you need, and how much food to purchase. At that point, owning the restaurant is business as usual. While you still have some wasted food at the end of the day, it is not significant.
It is the same with trading. Whether you are a fundamental analyst or technical person, at first, the learning curve is high. Many stop trading altogether before they ever get it figured out. But those that survive also have business as usual. While you will still incur some losses, just like the restaurant owner, they probably won't be significant.
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