Technicals Stability Returns
Investors today have many "assets" to guide their decision-making process. In addition to their wits and intuition, to be an effective investor, one must also be well versed in the "tools" of the trade, those being both fundamental, as well as, technical analysis. This "dynamic duo" enables the long-term investor or short-term trader to make sense of the wealth of information that might impact today's market values for every investment vehicle from stocks and bonds to commodities and currencies.
Fundamental information moves our markets. Technical information attempts to explain the how, why, and when. The common metaphor that is often cited is to think of a piece of fundamental information as a "rock" that is thrown into a pool of water. Before the rock is thrown, the pool is at equilibrium, but afterwards, chaos ensues. Technical analysis helps to make order of the chaos, describing the size of waves that move about and estimating when and in what form a new equilibrium might appear.
Fundamental Analysis then becomes the study of any economic, financial, political, or crisis-related factors that could influence the value of an asset in the market. Economic data releases are frequently made by industrialized nations and may have direct impact. Financial data could be anything from interest-rate policy of the Fed to the revenue growth of a company and the ability of its management to be competitive. Political factors relate to elections and law changes or to the ability of officials to deal with a debt crisis, as is the case in Europe at the moment. Lastly, a crisis can be natural or manmade, but it is generally unexpected and could have wide reaching implications.
Fundamental research can entail reviewing a company's financial statements, public information on product strategies, and earning projections and then making an assessment on the probabilities that the firm's management can deliver the goods for the long term. Study topics will vary by investment vehicle, but the simple question that must be answered is, "What information could impact my asset's value, whether positive or negative?" The process then evolves to monitoring these factors and their respective impacts over time.
Technical Analysis, on the other hand, is the chart study of previous pricing behavior of an asset in order to make forecasts about its future performance. The discipline's basis rests on three factors -- price is the ultimate result of all market forces; pricing behaviors tend to repeat; and, markets generally move in trends. This analytical art form in the past involved crunching many numbers with pen and calculator in hand, but, with today's modern trading software offered by stock and forex brokers alike, an investor can assimilate a mountain of numerical data in an instant to discern the nature of a current market move.
"TA", as it is commonly called, is not without its critics. It can appear very confusing to the untrained eye, and various academic papers have proffered that markets are random and that nothing can predict the future direction of prices. Technicians respond that their analysis is used to detect the consensus of trader psychology, a human factor, before they make a decision to open or close a position. Various indicators can give a hint to future directions by assessing the momentum behind a move and at what levels other traders may pause to assess their next moves. History has proven that "TA" does provide a competitive "edge" in a market when appropriately applied.
Long-term investors occasionally scoff at "TA", but buying on the "dips" and selling at the "peaks" depends upon these skills. Use both "tools" to improve your results.
Guest Article by Tom Cleveland from Forex Traders
