Fundamental Trading Versus Technical Trading.
Everything we teach at be a winning trader is very much based on technical analysis because we are looking at the charts of individual instruments and analysing past prices to predict future prices.
Fundamental trading is very different and it is good to look at the difference between the two trading styles. It could be said that they are on completely opposite sides.
Fundamental analysis when used to analyse a security is trying to measure the intrinsic value of that stock. To do this it is looking at earnings, assets, expenses and liabilities etc. In other words it is looking at a stocks value based on both tangible and intangible factors.
Fundamental analysis when trading currencies is a little different in as much as a Country has no balance sheet. The question could be “how can fundamental analysis be conducted on a currency”?
Since fundamental analysis is about looking at intrinsic value of an investment, when using fundamentals to analyse forex it entails looking at the economic conditions that effect the valuation of that nation’s currency.
As Financial traders we are all looking for value when looking to “Buy” or go “Long” an instrument.
When using technical analysis we are looking at the price action of charts for pattern recognition, such as higher highs and higher lows. This more often than not indicates buying pressure. Solely from a technical trading point of view a chart setup like this must really mean a “Value” area.
From a fundamental traders perspective they are looking for value based on the reading of the balance sheet and perhaps any general news of that stock such as new products being developed or released . They would also compare the current price of one stock to another within the same industry, selling similar products to discover if there is anything of note between the two. A fundamental forex trader could find value if a country’s economic performance and health is better than its opposite currency counterpart.
When using technical analysis to trade and you have a methodology and are disciplined in your approach but a signal goes wrong there is no excuse. It has to be described as “one of those things” with trading. Accept it, because it is sure to happen. That is why one should always only trade when the trade setup is within their risk parameters.
On the other hand as a fundamental trader there is so much that can go wrong with ones analysis because fundamentals are not just analyzing one aspect but multiple aspects of an instrument.
A prime example of this could be say a pharmaceutical company announcing a new breakthrough drug. The balance sheet looks good and now this new drug release should really only mean one thing. A stock price rally. Confusingly the stock has perhaps initially rose but quickly reversed or perhaps didn’t rally at all. This can be real scratchy head “stuff”. Perhaps what has happened that somewhere within this good piece of news there has been a bad piece of news released in the background. This bad piece of news has soon been picked up from an analyst(s) whom realises the bad news is much worse than the good news and the “Big” boys are using it as a sell opportunity. It is this that has quickly sent the stock lower. This is a very old trick often used by Companies when trying to protect their stock price. They release good news and then the bad news hoping that one will counteract the other. It is fair to say that if only the bad news was released then the stock price would surely fall and perhaps much more that would be liked. This example does certainly happen. It is not a fictional occurrence.
It is also very true to say that something similar can happen concerning the economy of a particular Country that would appear to be good news for the general market of that Country or currency of that Country only for the markets to go in the unexpected direction. This can be baffling!
When something like this happens many of the commentators on the Financial TV Channels often use the excuse when asked to explain a situation like this, “this piece of news was already factored in”. Please, please!!!
Off course there can be shocks as a technical trader also. This is trading!!
THE IDEAL SITUATION
The ideal situation is if one can get fundamentals and technicals in parity. This should give one very favourable odds that the traded instrument is going to go in the direction as intended.
This is not always easy but for example when the fundamentals of a stock are indicating that it is trading at a lower level than where it possibly should be and the technicals of the stock based on its price action and chart pattern are showing higher highs and lows then both types of analysis are indicating the one thing. A strong buying opportunity.
DO YOU TRADE FUNDAMENTALS OR TECHNICALS?
Depending on the type of trader you are such as, are you short term, medium term or more longer term/investor indicates if you use fundamental analysis more or less in your trading decisions.
The short and medium term trader are looking at technicals more than fundamentals because a trading decision can be seen and acted upon quicker when watching a particular price or pattern form on a chart. These decisions are not only entry and exit points but also “stop” points. The reason fundamentals are not looked at more in the shorter term trading scenario is simply down to the time factor.
The longer term trader/ investor can and should consider the fundamentals more and utilise them in tandem with the technicals for the purposes of finding signals on those instruments that are indicating a same direction trade. As an investor or longer term trader there is a little more time available to consider all factors. It is not a scenario of being in and out of a trade very quickly unless exceptional circumstances arise.
IN A FURTHER POST WE WILL LOOK AT THE DIFFERENT FUNDAMENTALS OF BOTH STOCK TRADING AND FOREX TRADING.
Such as the book value of a Company, the price earnings ratio, the gross domestic product (GDP), the retail sales report, Consumer Price Index (CPI) etc and delve into what each of these mean and how they can be seen to be acted on when reading them as good or bad news for trading a particular stock, currency or index.