The Failings Of Technical Fundamental Analysis
By Ultimate Trading
Technical Fundamental Analysis Is Far From Perfect
For a number of years, technical fundamental analysis was considered
the only real way to make trading decisions. In the late 70s and
technical fundamental analysis was used by only a handful of
traders. As difficult as it is to believe now, it wasn't very long
ago that most of the financial experts, major funds, and financial
institutions thought that technical fundamental analysis was a
flawed and nearly useless tool. Now most traders use technical
fundamental analysis, and consider technical fundamental analysis
Technical fundamental analysis is a way of looking at the market
that takes into consideration all the variables that could affect
the supply and demand of a stock or commodity. The analyst projects
what the price will be at some point in the future, using
mathematical models that weigh the significance of a variety of
factors (including interest rates, balance sheets, earnings
projections), and by paying careful attention to the business acumen
of the company. The problem with these models is that they rarely
factor in other traders as a variable. But its people, expressing
their beliefs and expectations about the future, that make prices
move - not models
The fact that a model makes a logical and reasonable projection
based on all the relevant variables is worthless if the traders
who are responsible for the trading volume are not aware of the
model. Many traders especially those on the floors of the
exchanges who can move prices dramatically in one direction or the
other usually don't have the slightest concept of the fundamental
supply and demand factors that are supposed to be affecting their
prices. And, at any given moment, much of these traders market
activity is prompted by a response to emotional factors that are
completely outside the parameters of the fundamental model.
Basically, the people who trade (and consequently move prices) don't
always act in a rational manner. Ultimately, those who use technical
fundamental analysis could find that a prediction about where prices
should be at some point in the future is correct. But in the
meantime, price movements could be so volatile that it would be very
difficult, if not impossible, to stay in a trade long enough to make
Today almost all experienced traders use some form of technical
fundamental analysis, to help them formulate their trading
strategies. Except for some small pockets in the academic community,
the purely fundamental analyst is virtually extinct. What caused
this dramatic shift in perspective?
In one word, money. The problem with making trading decisions from a
strictly fundamental perspective is the difficulty of making money
consistently using this approach.
fundamental analysis creates a gap between what should be and
what really is. Analysts are projecting the effects of the variables
into the future, and projecting the future prices from that. This
gap makes it difficult to make anything but long-term predictions,
and these can be difficult for a trader to exploit.
In contrast, technical analysis not only closes this gap, but also
makes clear a large number of possibilities for the trader to take
advantage of. The technical approach opens up these possibilities by
identifying how the same repeatable patterns of behaviour occur in
different time-frames whether by the minute, daily, weekly,
yearly, and longer. Technical analysis turns the market into an
endless stream of opportunities.
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Technical Fundamental Analysis