Why Technical Analysis is a Better Tool for Understanding the Market

Have you ever placed a trade only to have it go the other way? Or maybe you’ve closed a losing position only to have the market turn around and charge strongly in the direction that would have benefited you. Often, we can feel like the market is playing games with us (and with our hard-earned trading capital)! Are there any tools out there that can help us better understand where the market is headed?

Let me introduce you to the two most commonly employed trading tools – Fundamental Analysis and Technical Analysis. Both of these tools help us measure and gauge market sentiment i.e. assess the likelihood of whether the market will trade upwards or downwards. Note, the word likelihood. We can never know with 100% certainty where the market will trade.  Behind every price, every transaction completed and every trade settled are human beings just like you and me. Who can know for sure, or predict with absolute accuracy what another human being will do?

Let’s talk about Fundamental Analysis. What is it? Fundamental Analysis is a method used to measure the intrinsic value of a financial instrument. Trading ideas are then formed based on whether the financial instrument is above or below its intrinsic value. Fundamental Analysis is frequently used when trading stocks and shares because the data for these computations are widely available in published financial reports (This data is also time-static, meaning it’s not getting updated until the next reporting cycle). When it comes to other markets however, for example Forex or even commodities, the data required for computations may not be easily obtainable and therefore Fundamental Analysis faces serious limitations.

On the other hand, Technical Analysis are studies based on up-to-the-minute market data, mainly price action and trade volume. Trade ideas are formed based on what is observed on the live charts. I like to think of charts as being living snapshots of where buyers and sellers are at, how they’re feeling (Bearish? Bullish?); and then make a calculated decision on whether I will join the buyers or the sellers in trading that particular market. If the market goes up, the buyers have won. Conversely, if the market goes down, the sellers have won. Of course you aren’t going to be able to join the “winning side” all the time. The “correct” decision comes down to a balance of probabilities and that’s where a trading strategy based on multiple Technical Analysis factors can greatly increase your chances of having a winning trade.

In conclusion, please think about these two trading tools and how they help you gauge human emotion. If you think human emotions are likely to remain constant over a long period of time then perhaps Fundamental Analysis is for you. However if you think humans are dynamic, changeable beings, capable of both rational and irrational behavior, the perhaps you’d like to use Technical Analysis to measure the pulse of the market as people transact with each other.

The choice is yours, happy trading!

Regards,

Karen Chow
The TWP Team