V13:09 (384-387): Comparing Technical and Fundamental Analysis by Alex Saitta

NOVICE TRADER Comparing Technical And Fundamental Analyses by Alex Saitta

Philosophically, technicians and fundamentalists appear to be at odds: One group studies underlying factors driving the market, while the other focuses on the market itself. Technical approaches count on the existence of price trends to make profitable strategies, but fundamentalists count on trends, too. Here, one market analyst reviews the differences and similarities between the two.

If nothing else, fundamental and technical analysts agree on one thing: The trends of fundamental forces are the sole reason for every long-term price trend. Bull and bear markets are the result of economic fundamentals. Historical technical data or price charts don't cause a market to trend up or down. Fundamentalists and technicians, however, do attempt to solve the same problem, identifying which way the fundamentals will push the market price next.

Here's where the two analytical methods part ways and why the approaches differ.

Generally, fundamental analysts predict which fundamental variables will be next to cause the market price to trend and whether the variables will cause an uptrend or downtrend. Technicians see two drawbacks with the fundamental approach. First of all, there are many fundamental variables that could affect the market, so technicians believe it is impossible to consistently predict which variable will drive the market price up or down. For example, demand for credit is strongly tied to economic activity, and the demand and supply of credit determine interest rate levels. Therefore, economic growth is often but not always the dominant fundamental variable in the Treasury bond market.