Technical Analysis Versus Fundamental Analysis

Although they both have the word Analysis in the name, Technical and Fundamental Analysis are vastly different. Without diving too deeply into the meanings, Technical Analysis is focused on price, charts, volume, trends, and historical data while Fundamental analysis looks at factors such as economic indicators and financial statements to assess and determine the intrinsic value of a company. When looking at specific products such as Currencies and Commodities, Fundamental analysis is more focused on macro trends, geopolitical events, and supply/demand patterns, among other things.

Is Technical Analysis accurate?

Technical Analysis can be accurate but it’s also fully subjective. In other words, while some patterns may have worked in the past, It does not mean they will necessarily have the same outcome if they happen again. The accuracy of your analysis will depend on a variety of factors such as:

• Experience and expertise
• Market conditions
• Potential sudden or breaking news (That could alter markets fully)
• The overall trend 

To explain further, spending countless hours reviewing historical data and spotting patterns can help you build the discipline needed to trade them. Nonetheless, that’s one part of the equation and there’s other factors to look at that would help you determine the likelihood of success of that specific trade.

Pros and Cons of Technical Analysis

If the theory that market information is already included in price is true, then one advantage of Technical Analysis is its ability to give us everything we need without having to examine other market-related factors. Put simply, a Technical trader will find a trade, determine entry and exit points, and execute, leading to a simple and straightforward approach to trading.

On the other hand, the markets are very dynamic and ever-changing, not to mention the chance of sudden or breaking market and non-market related news that could alter prices completely. Those two facts alone should be enough to convince traders that relying solely on TA is limiting.

The best approach is to look at a variety of aspects that could affect the markets including Technical and Fundamental Analysis. By doing so, traders can increase their chances of executing successful trades, especially if a good risk management strategy is in place.

Is Technical Analysis self-fulfilling?

Yes, Technical Analysis is self-fulfilling and that’s not a bad thing. It means that TA does, in fact, work occasionally. The majority of patterns, indicators, and other TA tools, when combined with general psychological behaviour, can lead to common trading events. For example, the 200 day moving average is a very popular indicator. Many traders believe that the price will bounce off of it. With that in mind, those traders may look to buy at around the 200 day moving average. What happens next is that the price visits that area, triggers a large amount of buy orders, and potentially moves higher. It’s worth noting that in other instances, the market can be trickier. For example, a brief and potentially fake dip below the 200 moving average may cause those buyers to liquidate their positions, only to see the market go back up again.

The takeaway

Technical Analysis is an important part of every trader’s toolbox but it’s also not a great idea to rely on it solely. When combined with Fundamental Analysis and while keeping other market factors in mind, it becomes a much more reliable approach. Any trader, new or experienced, should definitely spend time learning TA and practice applying it.   

Please be advised that any marketing commentary provided here is for educational purposes only and should not be considered as financial or investment advice. Trading and investing carry high level of risk, and investors and/or potential investors should conduct their own research and consult with a qualified financial advisor before making any decisions. Past performance is not indicative of future results, and there is no guarantee of profit. Always take into consideration your risk tolerance and financial situation and your ability to sustain any losses, before engaging in any trading or investment activity.