This article will explain some of the differences between Technical Analysis and Fundamentals and explain a bit about each type of trading. Excerpts are taken from the best-selling book ‘Market Wizards’ where Jack Schwager interviews Ed Seykota and Bruce Kovner.
Ed is a trend trader (uses technical analysis) and also relies on hunches from 20 years of experience. He definitely emphasizes his reliance on technical analysis. Reading this, I like, the ‘hunches’ to the knowledge of the effect that fundamentals can have on a market, although I could be wrong, they can be purely from reading many charts as well. Here are exactly the words “Fundamentals we read about are typically useless, since the market has already discounted the price, and I call them ‘funny-mentals’. However, if they catch on early before others believe them, then they can have valuable ‘surprise-mentals’.”
Ed says his priorities when trading is the long-term trend, the current charts, and choosing a good place to buy or sell, in that order.
Bruce says that technology is amazing and very useful, but in no way disregards fundamentals.
It is important to note that technical analysis is a critical method for understanding the history of market movements and therefore useful for identifying trends. It does not actually tell us where the currency is going but analyzes historical data. We then need to use our own intelligence to see what the trading activity says about future trades.
Technical Analysis can be compared to taking a patient’s temperature. Ignoring it is ignorance and can tell us whether a market is active, or cold and sleepy.
It also picks up unusual behavior. Anything that creates a new chart pattern is somewhat unusual. He also says, “Studying the charts is absolutely crucial and alerts me to imbalances and potential changes.
It is the fundamentals that will help indicate whether a trade value will increase or decrease.
Everything that makes a country tick, in terms of FX. Consumer spending, government spending, the employment cost index, government policy, political concerns, and even an individual event can strongly influence the market.
In summary, fundamentals will indicate the direction of a price but not exact prices. Graphical analysis or technical analysis is better for this, so together they can really increase your chances of getting away with a few pips.
The reason that technical analysis is so emphasized is that many traders use charts to trade and at any given time they will be drawing the same resistance lines and the same support lines. So if you can read charts well, you have a fantastic chance of predicting market movements. The best way to learn about the effect of fundamentals is to learn one piece of economic data at a time. This will help you make more educated trades.