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Friday, November 23, 2007

The eternal fight between fundamental and technical analysis.

There are a few schools of analysis when it comes to trying to identify what the market is telling us about price and time.

Fundamental Analysis.

Technical Analysis.

To sum it up as briefly as possible, Fundamental Analysis looks at what fundamentally moves the market such as news, analyzing supply and demand and can include such things as looking as seasonal pressures that markets face. Fundamentalists study factors that affect the securities value in the 'here and now'

Technical Analysis looks to the charts that are plotted through time and price - to determine what the price is trying to tell us about the market. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Chart patterns, oscillators and the like are used by technical traders. Technical analysts believe that the historical performance of stocks and markets are indications of future performance.

Each has it's strengths and weaknesses. Sometimes, those strengths and weaknesses, or the underlying theory behind fundamental analysis and underlying theory behind technical analysis are a bit at odds with one another. This leads to a dichotomy and two schools of thought; that one method is better than the other. Ones argue why fundamental analysis "won't" work. Which is dumb, because ones have made a lot of money using it. Others argue why technical analysis "won't" work. Larry Williams would argue with that one. That man currently holds the record for his ability to turn a fortune within the span of one year in the futures markets. He did so using technical analysis. But the argument and war rages on.

Which to my mind, is just silly.

There is no 'one way' to trade the markets. Why?

Because in the end, both theories have strengths. They both work well, given certain circumstances. I'm the kind of person that looks for strength, and then tries to capitalize on that strength. I recognize the weakness, and learn to work with it. This principle has served me well whether it's trading the markets, or dealing with my fellow man.

So in the end, I have learned to use technical analysis to identify my entrance to a market. In other words, when I pull the trigger and put my buy order in, at what price should I be filled? On what day should I look for my entrance. Technical analysis excels in assisting you to do this.

I use fundamental analysis to look for a good market to enter to begin with, or if I should steer clear.

I'm not a smart enough guy to use one method alone. I figure it's better to stack the deck in my favor. Smile

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