free-money-forex

trading Anaysis - Fundamental vs. Technical Analysis

Traders are always debating the relative merits of fundamental and technical analysis.


The proponents of fundamental analysis rightly point out that ultimately the forces of supply and demand can only be truly understood by careful and complete determination of the underlying "real" components that move the markets.



Fundamental analysis involves looking at the supply of the commodity and then determining the demand that exists for the particular product. In the soybean market, for example, a fundamentalist needs to study planting acreage, yields per acre, carryover supplies, weather and other related factors to determine expected production and then weigh the anticipated supply against the expected demand. Demand is determined by historical usage and factors that affect changes in usage such as livestock numbers, exports to foreign countries, biodiesel production, oil consumption and others.

The technical analyst relies on charts to present a graphic representation of supply and demand. Chart analysis involves understanding patterns that tend to repeat over time and using these patterns to help in determining timing and correct price levels for initiating trades. Common patterns include those indicative of tops and bottoms (head and shoulders formations, double tops, trendline breakouts, etc).

Which type of analysis is likely to be more effective in helping a trader to be successful? This is a topic that has been the subject of great argument for almost as long as there have been markets to trade. When I first started trading I worked with Ed O’Connor, legendary founder of First Options and O’Connor & Company. Ed was a strict fundamentalist and was quick to point out that "every ship at the bottom of the ocean has plenty of charts aboard". He believed that there was no substitute for knowing the underlying numbers of supply and demand before one could make sound judgements about market movements. Another of my early mentors was Vince Schreiber, who successfully used charts to predict an enormous move in the British Pound against the Dollar. Vince was convinced that the charts helped to not only project the magnitude of the move but also to show him the exact time to enter and exit the position.

It is clear that both types of analysis have been successful in theory as well as practice. Which will work best for you? The more I have studied the subject, the more I have been driven to the conclusion that a good trading strategy should incorporate a bit of each school of analysis. Knowing the fundamentals will make sure that you are never on the wrong side of the biggest moves. Fundamentals are essentially the "common sense" component that will keep you from being fooled by the moves that occur due to natural market volatility. Charts will make sure that you can manage the risk. Traders know that good money management is essential in the highly leveraged world of futures and forex trading. Using charts will help you to pre-determine the amount of risk you are willing to take on any particular trade. Keeping losses to a minimal amount will keep you in the game long enough to be able to benefit from the big moves.

Bill Henner

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