Technical Analysis of Financial Markets

Technical Forecast versus Fundamental Forecast

Technical analysis focuses on studying market movements, while fundamental analysis examines the economic forces of supply and demand that affect prices. The fundamental approach considers all the factors that influence the price of a market to determine its intrinsic value. If this value is less than the current price, it is considered overvalued and should be sold; if it is higher, it is considered undervalued and should be purchased. Both approaches seek to predict market direction, but they differ in how they approach this problem. Fundamentalists study causes, while technicians focus on effects. For technicians, the effect is the fundamental thing and they do not need to know the causes. Although many traders classify themselves as fundamentalists, the reality is that there is overlap between the two approaches. Charts and fundamentals can conflict, especially at critical times of important moves. However, technicians are confident that the market usually anticipates fundamentals, and acts accordingly. As technicians develop their ability to interpret charts, they become more confident in their approach. They accept that, in key situations, market movements often precede confirmation of fundamentals. Technicians believe their approach is superior because it includes fundamental analysis, while fundamental analysis does not address price movements. Trading can be done using technical analysis alone, but trading using fundamental analysis alone is less likely to work.