Age Old Trading Question: Technicals vs. Fundamentals

Age Old Trading Question: Technicals vs. Fundamentals

There is an old saying in trading that the market can remain irrational longer than you can remain solvent.

This is especially true in leveraged (margin) trading where you can trade a multiple of your capital.

This brings up the question, can you trade purely on technicals and avoid looking at fundamentals of Vice versa?

The answer is not clear cut although unless you have very deep pockets there is a better chance to trade purely on technicals rather than on forex fundamentals.

This doesn’t mean you should ignore either but at a minimum be aware of the fundamentals so you know how to react to news or key events.

Take Friday, October 6 as an example when the September US employment report was released. Nonfarm payrolls came in way above expectations (plus upward revisions), bond yields spiked higher, the dollar shot up and stocks tumbled. The reaction proved to be short-lived after closer inspection of the data had some focusing on slightly softer wage growth. Post data moves were more than reversed with a retreat in bond yields leading the way for other markets.

So while technicals fuelled the reversals the catalyst appeared to be a fundamental look at the data.

Technicals vs Fundamentals

Technical analysis and fundamental analysis are two primary approaches to trading in financial markets:

1. Technical Analysis:

1. • Focus: Technical analysis involves analysing historical price and volume data, as well as chart patterns and various technical indicators (e.g., moving averages, RSI, MACD).
   • Assumption: It assumes that historical price and volume patterns tend to repeat themselves, and that market trends can be identified and used to predict future price movements.
   • Short-Term Focus: Typically used for short-term trading and timing entry and exit points.
   • Critics: Critics argue that it may not consider underlying factors affecting an asset’s value.

1. Fundamental Analysis:

1. • Focus: Fundamental analysis examines the intrinsic value of an asset by analysing various factors such as financial statements, economic indicators, company news, and industry trends.
   • Assumption: It assumes that an asset’s price will eventually reflect its fundamental value, and trading decisions are based on this assessment.
   • Long-Term Focus: More commonly used for long-term investing, as it’s focused on the underlying value of assets.
   • Critics: Critics argue that it may not account for short-term market sentiment or technical patterns.

Traders often use a combination of both approaches or choose one based on their trading style and objectives. Technical analysis can help with short-term trading decisions and identifying trends, while fundamental analysis provides a broader view for long-term investments. Ultimately, the choice between the two depends on a trader’s strategy and goals.