FUNDAMENTAL OR TECHNICAL ANALYSIS?

14 sept 2022

The debate about the most reliable and effective method to trade the markets with is still on.

Whether it is Cryptocurrencies, Forex or the Stock market. It is imperative that the serious trader has an effective tool that will give them an edge in the markets.

Most professional traders in investment banks would argue that fundamental analysis is the most effective method to rely on when making considerations to take a position in the market.

Fundamental analysis is the study and research of a particular asset, whether in the Cryptocurrency market, i.e. Bitcoin, Etherum, Litecoin, or in the Forex market where you have currency pairs like Eurusd, Gbpusd Usdjpy and so on, or in the stock market where there are company shares to be bought like Apple, Amazon and Tesla.

In the Crypto world, the fundamental analyst will focus on the progress of a particular cryptocurrency, this could be measured either through the acceptance of a particular crypto by financial institutions, or companies or country.

An example of this was seen in the market on the 8th of May 2021 when Dogecoin had a rise to it's highest point (0.74 cent) after a series of tweets from Elon Musk (CEO and founder of Tesla).

In Forex the fundamental analyst will look to the GDP (Gross Domestic Product) of a country, or CPI (Consumer Price Index) to make a decision whether to buy or sell.

The fundamental analyst will also study the statement coming from the central bank of a particular currency, i.e. for GBP(Great British Pounds) it will be The Bank of England, for the Euro it will be The European Central Bank (ECB) and for the dollar it will be The Federal Reserve (The Federal Reserve System).

The fundamental analyst studies the statement made by the Central bank governor or other high ranking members before making a decision on whether to buy, sell, or stand aside.

In the Stock market, the fundamental analyst will most likely study the company earnings, quarterly reports and the general health of the company, the fundamental analyst wants to know if the company is in losses or profitable, and if profitable, the fundamental analyst wants to see that the company has a steady equity growth, The fundamental analyst is interested in the leadership of the company, what the company does, and if it's products are in high demand.

All these are factors that guide the fundamental analyst when making a decision to take a position, whether Cryptocurrencies, Stocks or Forex, one thing is certain, and it is that a robust research must be carried out by the fundamental analyst before taking a position in the market.

Most retail traders are technical analysts, and do not look to the Central banks, in the case of currency pairs, company earnings in the case of stocks, or the acceptance by financial institutions in the case of cryptocurrencies.

Instead, the technical analyst studies the charts, the primary objective is to look for recognizable patterns that has been identified in the past and could show up again in the future, albeit with slight difference in appearance.

The technical analyst could rely on the application of traditional technical analysis and make use of indicators, oscillators, trend lines, Fibonacci tool, pattern recognition (divergence, hidden divergence, double tops and bottoms flags e.t.c) with close observation of these tools, a technical analyst could tell with very high level of accuracy the next direction of an asset.

Of course the above statement is true only in the absence of a Black Swan event. The word Black Swan is used in the trading world to identify an unusual day, where things abnormal occurs and could destabilize the market. Examples of Black Swan events are: Brexit, Trump winning the 2016 election in the U.S., and the Swiss national bank removing the cap on the Euro in 2015.

The technical analyst could also rely on harmonics to trade, looking at the patterns on the charts with or without multiple indicators. An example would be the application of the Elliott Wave theory, where there are impulse or motive waves in the form of a five step move in the direction of the trend and corrective waves in the form of a three step move that goes counter trend hence the term corrective waves. The Elliott Wave Theory is an effective method to trade the market if practiced and applied correctly.

In conclusion, it is fair to note that both technical analysis and fundamental analysis like everything else in life have their strengths and weaknesses.

However, it might be a much more effective method to combine both the technical and fundamental analysis of any asset before making a decision. That way one could have the best of both worlds and a higher probability of profitability in the markets.


John Emefeke.
T.A.