Technical vs. Fundamental

I consider myself a technical trader. What does that really mean and what are the advantages?

Technical trading is based on technical analysis – the use of price action to determine trends and potential trend reversals. The consistency of technical analysis lies in the fact that all traders see the same thing when looking at a chart. They may react differently, but the data they observe is the same.


(Click on chart to enlarge)

Based on the chart above, 1000 out of 1000 traders would have to agree that . . .

The candle at 1 is the structure low of the price action shown.
The candle at 2 is the structure high of the price action shown.
The candle at 3 is the swing low immediately following 2.
The candle at 4 is lower than the low of the candle at 3.

The point simply is that there is nothing that is subject to interpretation. Therefore, because the information is the same, this levels the playing field between all traders viewing this data. What they do with the information may vary widely, but the fact remains, the data is the same for all.

Fundamental analysis is quite another story. Fundamentals hinge largely on speculation. Although they clearly effect the markets, they are subject to wide interpretation. If they were not, we would not need the likes of CNBC, Bloomberg and other financial information outlets. These sources owe their existence to the opinions of their “experts” that consistently debate opposing viewpoints; their interpretation of the data generated by the fundamental variable and how it will affect the market. Furthermore, beyond our resources, there may be inside information or other factors we are unaware of that will influence the outcome of the news. Without this additional information, it would be ridiculous for us to speculate as to the market’s behavior. We would never have enough information to create an edge, so trading purely on fundamentals is not wise because the risk for most of us is unacceptable.

As technical traders, we are only interested in what the results are, not why. We can observe the market’s reaction to fundamental data, but we react with a technical approach. We know that news (fundamentals) may move the markets, or not. We never know to what degree or in which direction the market will react until we actually observe the outcome using our technical analysis. How often have we thought the market should do one thing based on fundamental data, and to our minds, the market’s reaction was totally the opposite? How often have we found that there is really little correlation to news and the market’s reaction to it?

It is often said that fundamentals drive the market and we can all cite infinite examples. That premise is not in dispute. However, all we have to concern ourselves with as technical traders is that something did happened and the price action we observe is the result. We need to be aware of the news, but we should never assume we know how the market will react to it.

Don’t get caught up in the speculation. Know when the news is coming, but let your technical analysis and trading plan dictate your rules of engagement – not the pundits.

Rick

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