The Technical vs. Fundamental Approach

One of the most common arguments amongst market commentators is what works best – the fundamental approach or the technical approach. It’s true to say that Fundamental strategists have a distrust of technicians and vice-versa. So what to do?
I have to say that there is room for both approaches and I do not hold with the view that there is no value in technicals at all as some Fundamental commentators believe. If Fundamentals are so good then why do economists never agree? The fundamentals are there for all to see so surely the market should move in the way the economists expect? With this in mind I am going to outline a case for the technical approach for those of you suspicious of it.

Background
If you adopt a fundamental approach to trading then you need to look at financial ratios, know about how company balance sheets, and how the Global Economy works. The technical approach shortcuts this knowledge and strips everything down to one key data point – Price. The technical approach has been around for a good few years starting in the 16th Century in Japan and also evolving in the late 1880’s in the U.S.A. There is one common tenet underlying both approaches and plenty of evidence to support the fact that it works. It operates under a number of basic premises, the most important of which is that “Everything is discounted in the Price”. The technician takes the view that the price reflects all fundamental information currently available to everyone. This means therefore that the price should be a fair reflection of the underlying fundamentals.
Taking a View –
Let’s look at a price chart and ask ourselves a question – what is the price on this chart doing? – Quite simply it’s going up – we don’t know why and as technicians we don’t care.



We don’t care what the chart is; we don’t care what value the price is either – it could be the price of coffee, cocoa, BP or anything else you could think of. We don’t care what it’s EPS is or its P/E or PEG - as a technician we’re not concerned with any of that – all we need to know is – it’s going up – let’s buy it and make a profit. As soon as we see a price chart we know all we need to know about the underlying – it’s going up and the market thinks so too otherwise they wouldn’t be buying it!
Conclusion
That’s about as simple as it gets with respect to the technical approach – obviously it is a lot more scientific than how I have just outlined it but in a nutshell this is the difference between the two approaches. With fundamentals you are analysing reams of data points – with the technical approach you are analysing one piece of data and at the most two if you include volume. I will examine the relationship between volume and price in later articles along with other technical analysis subjects - these articles will hopefully broaden awareness of technical analysis as a trading tool and dispel some of the myths surrounding it.