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Fundamental analysis versus technical analysis – you might be both?
I don't see the argument as much between traders who preferred fundamental analysis over technical analysis and vice versa.
These traders are often very passionate about their preference and trading methodologies but my personal opinion has always been that in order to trade correctly we are probably using both methods to trade.
For the record, Investopedia states that fundamental analysis is a method to evaluate by attempting to measure intrinsic value. Fundamental analysis also studies everything from the economy and industrial conditions to the financial condition and management of a company.
Investopedia also states that technical analysis is the evaluation by means of market activity which includes past prices and volume. It also states that technical analysts do not measure the intrinsic value but instead they use charts to identify patterns in order to determine what price may do in the future.
Obviously there is much more to consider using both of these methodologies but I personally don't see how as a successful trader we aren't actually doing both.
I have personally trained hundreds of traders and watching them I have observed that everyone learns and processes information in different ways. Because of this basic fact, some people will be inclined to prefer a trading system that exclusively analyzes economic data and statistics. Just the same, another trader will prefer to look at a chart and use mathematical calculations and study indicators.
The reality is that your personality will dictate your trading style.
Let's take a technical trader for example. This trader will spend a great deal of time looking for specific patterns to develop on a chart which may indicate a potential trade or identify possible future trends.
But my belief is that this technical trader whether he knows it or not, is also trading off of economic data and fundamental analysis.
My personal experience has concluded that using both methodologies is the most successful way for me to trade. I realized that even though I look for specific entries and profit levels by studying my charts in a technical manner I am also trading the result of activity which moved price, based on the outcome of fundamental analysis.
When I first realized this I began to think about how and why price moves.
It begins with fundamental analysis, including economic data which is released to the markets.
Once this information has been made available, traders then analyze that information and make a decision as to whether or not they think price is too high or too low considering the data.
Once the market has collectively made a decision it then becomes market sentiment.
This creates trending moves both up and down and begins to reflect in price.
The change in price is immediately seen on the chart.
So as a technical trader, I sit and wait for specific patterns that will give me a signal to buy or sell.
The signal only comes from price movement. Price movement only comes from market sentiment or the reaction of traders to economic data, fundamental analysis.
Either way, when I place an order I am basically using both methodologies.
This was a very important revelation for me. It pointed out the importance of understanding why price moves. Obviously understanding fundamental analysis or economic data can be a lot more difficult than understanding technical analysis for some people.
At this realization, I stopped resisting and learned to accept both methodologies Once I did this I became much more profitable and trading became much more comfortable.
If you still prefer one methodology over the other and choose to ignore what you are not interested in maybe it could help if you look at it in a different way.
If you prefer technical analysis over fundamental analysis, could it be that you simply do not like trading immediately off the release of economic data?
We all know that it's possible to trade many different time frames. This is just a matter of personal preference but a short-term small time-frame trader who prefers a five-minute or 15 minute chart may prefer trading immediately went economic data is released.
I'm not going to go into the logistics of this type of technique but you can still trade economic data without understanding it and without the need to jump in to the trade immediately upon the release of economic data.
Again using technical analysis and perhaps a larger time-frame such as the four hour or daily chart, this would allow you plenty of time to digest the information and watch the reaction of traders which will be obvious when price moves. All that's required is to wait for price to trigger a signal based on your trading system.
How can you apply this information to your trading system?
I have often suggested to traders who do not like economic data or fundamental analysis, that they should watch the news as it's being released just for entertainment value. Once the news is released watch the debate on the financial channels. During the course of a few hours watch the chart on a larger time-frame and see where price goes and if it actually gives a signal.
Eliminating the stress and confusion of not understanding something and trying to make it more entertaining will allow you to absorb much more information. Since we all know that trading is a business and something that you will be doing for a long time, you will have plenty of opportunities to watch and learn as the economic data is released.
What about the fundamental trader ?
How does a fundamental trader go about placing an order to buy or sell?
My personal opinion again is that in order to earn a profit we need to either buy low or sell high.
One of the best ways to determine this is by simply looking at a chart.
If I was exclusively a fundamental trader, before I placed an order to buy or sell I would still need to see if price is either high or low relative to support and resistance levels on larger time frames.
I personally know a few fundamental traders and I have caught them red-handed looking at a daily chart with a moving average on it. In my book that's technical analysis even at the first-degree.
My conclusion after all of these experiences is that to understand both methodologies, incorporate them into a trading system and understanding that learning how to trade is an ongoing process that may never end, is probably the best way for me to be a profitable trader.
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