There are a number of questions I get when I meet aspiring traders but one of the most common is for my thoughts on the fundamental analysis vs technical analysis debate. It's a big topic to consider because where you decide to focus your efforts will make a huge difference to the type of trader you will become and what your typical trading day will be like.
To get started, it's important to quickly define these terms and look at some of the differences between fundamental analysis and technical analysis. From there, I will explain why I trade and teach with a particular analysis focus and why it's so important when it comes to the ideal trader lifestyle.
Fundamental Analysis and Technical Analysis Defined
Fundamental Analysis: A method used to evaluate a tradable asset by attempting to determine its intrinsic value. This involves the broad study of markets and analysis of the overall state of economies, production, and employment.
Technical Analysis: The evaluation of a tradable asset by studying chart activity (price and volume) and the statistical outcomes of various scenarios. Technical analysts don't measure an asset's intrinsic value but instead focus on identifying trends and price patterns that suggest the likely future outcome for price movement.
Fundamental analysis often assumes that the short-term market price is incorrect, but that the value will correct itself in the long run. Profits are made by buying or selling a mispriced asset and then waiting for the market to correct its "mistaken" current price.
Technical analysis is the complete focus on an asset's price chart because of the belief that all of the fundamentals are already "priced in" to the market. It looks at the movement of price, momentum, and the structure of the market to find patterns that lead to high probability outcomes. Recognizing these patterns and their positive expectancy allows traders to enter the market and exit later at a better price for a profit.
Fundamental Analysis vs Technical Analysis Breakdown
The Differing Approaches of Fundamental and Technical Traders
So here's where things get interesting. Both of these analysis techniques (or a combination of them) can be quite profitable in the right hands, but lets consider the differences between traders of fundamental analysis vs technical analysis.
The Fundamental Analyst
To be a fundamentals trader often requires you to put in a great deal of study each day. There are always recent economic reports to read, news events and publications to take in, and a huge amount of global factors to consider at any given time. Fundamental analysis can be powerful, but it often takes traders months or even years to get a good grasp of all the various pieces of the economic puzzle.
Not only that, but there is no time to slack off once you've reached a level of competence in your fundamental analysis. With the huge range of shifting factors involved, even taking a day off from studying economic events can leave you puzzled and confused. Many of the best fundamental traders spend three or four hours every single day studying in order to prepare their trading setups.
The Technical Analyst
Technical traders on the other hand have a much simpler approach, but that doesn't mean it's always easy. A technical analyst needs to know their market and the way it moves through dozens of hours of chart study. They need to be able to recognize patterns and see them play out often enough that they can be confident in their statistical edge.
The benefits of being a largely technical-focused trader are numerous. Once you've developed your pattern recognition and confidence, it's much easier to stay near the top of your game. Technical traders can sit down in front of their charts five minutes before the market opens and feel 100% prepared to trade as the market develops. What matters to a technical trader is how price is reacting to various areas NOW. There's no need to be overly clever by trying to figure out if the market is priced imperfectly, because as far as they are concerned the current price is all there is. Properly applied, this simplicity in analysis leads to simplicity in execution and excellent results.
The STA Analysis Approach
For me, trading has always been about freedom. Who wants to be tied to their desks for hours each day conducting market research if you don't have to? This thinking led me into the arena of technical analysis in my early days and I've never looked back. While it's still important to be aware of major news releases and avoid trading just before them, that's about the extent of fundamentals we use here at Samurai Trading Academy.
Our day starts with a quick 5 minute look at our charts before market open and then we are fully prepared for the trading day ahead. Sounds a lot better than hours of study to place a single trade, doesn't it? This is the benefit of being a technical analyst but just because it's a simple approach doesn't mean you can learn to apply it without effort.
Technical analysis still requires having a tested trading plan where you have confidence in your setups. Getting to this point takes some time observing the markets and practicing your craft in a simulated trading environment, but can be accelerated by finding an approach that has already been time-tested by others.
After you put in the work and build your pattern recognition, it's always with you. At any time, you can jump into a market and feel that you are prepared to trade and profit from it. In terms of lifestyle, this is a huge edge that allows you to be very flexible with your time and routine. STA was built for those who value their freedom and the ability to trade from anywhere and at any time. Using a technical analysis approach to our trading allows us to trade on our own schedule and realize those goals.