Fundamental vs. Technical Analysis: The Age-Old Battle
In the 1980's Jack Schwager was a struggling trader. On two separate occasions he had turned $10,000 into over $100,000, but on each occasion he had been unable to keep his gains, and both times he ended up erasing all of his profits in a short amount of time. A bit perturbed at his inability to build on trading profits, Schwager came up with a brilliant idea. He was not sure why he kept losing money in the market; however, he was employed as an analyst at a trading firm, so he was well aware that most people, in fact, do lose money trading. But Schwager's question was, why?
In order to answer this question, Schwager decided to set out to interview 20 of the top traders in America. He would ask them in-depth question on their journey to becoming multi-millionaire traders including topics such as trading strategy, risk management and psychology. His hope was that the findings of his quest would not only help his own trading, but also the thousands of struggling traders who battled the same issues.
Two of the many successful traders interviewed in Market Wizards are Jim Rogers and Ed Seykota. Concerning the issue of technical versus fundamental analysis, these two traders sit at each extreme of the argument. Rogers is a fundamental trader to the core, and in his interview with Schwager he famously says, "I have never met a rich technician." Seykota on the other hand is a technical trader. He was one of the first fund managers on Wall Street to build computer programs to trade for him, and he has been incredibly successful. In his interview with Schwager, Seykota talks about how he never made any consistent money in financial markets until he became a pure technician-and he has made a lot of it!
So, back to our original question in the title of this article-which is better, technical or fundamental analysis? The answer is both are very effective. It comes down to each individual trader and how they are psychologically wired. Some traders will naturally be more drawn to fundamental analysis, while others will be more naturally drawn to technical analysis. Both are powerful, and there are multitudes of traders who have made money both ways.
The analysis of price. If you strip everything away from trading and zero down to the most essential element of trading you will arrive at price. Price is what trader's trade. They do not trade the underlying asset; they trade the price. Technical analysis is the evaluation of price, both presently and historically, in order to determine what might happen in the future. A true technical analyst believes that everything is priced into current price, and therefore, there is no need for fundamental analysis. Technical analysis is always advancing, especially as computers and artificial intelligence advances. Today, super computers that cost millions of dollars help traders develop high level mathematical quantitative strategies to take advantage of inefficiencies in financial markets.
The analysis of macro and micro economics. The type of analysis will depend heavily on the underlying asset. In the world of currency trading, fundamental analysis will generally be relegated to macro economic analysis as traders and analysts analyze the global economy and the big picture of what is happening. In stocks, fundamental analysis may include analyzing a company's financials including balance sheets, cash flow etc.
|Technical Analysis||Fundamental Analysis|
|Strengths||A private trader sees same information as a large firm.
Opportunity for private trader to compete with large firms on equal playing field
|Expectation of emerging fundamentals is what drives
Get in very early on new trends
|Weaknesses||Positions can be destroyed by unexpected news releases
Can catch trends early, but this type of analysis generally lends itself to getting in once the new trend is confirmed
Very hard to pick tops and bottoms
|A private trader is at a huge disadvantage. Does not have
access to information that large firms do
Large firms generally employ an entire team of analysts to support traders. Doing it alone is very difficult.
May have to sit through long DD’s before rest of market joins your view.
Jennifer Gorton is the content manager of Forex Traders – a forex trading analysis portal. Her main task is to make sure all the articles on her site are very educational and useful while also planning out new ideas for the ever-growing financial widget section. She has recently expanded her knowledge on certain investing aspects and is quite thrilled to share the information she's discovered.
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