My take on fundamental versus technical analysis
Bullion.Directory precious metals analysis 7 March, 2015
By Terry Kinder
Investor, Technical Analyst
While as a technical analyst I try to be unbiased, my view on fundamental versus technical analysis definitely leans in one direction.
Fundamental Versus Technical Analysis | |
| Fundamental Analysis | Technical Analysis |
| Economic data/news and industry specific news influences prices | Fundamentals are embedded in price |
| Price cannot be predicted | Price is cyclical and can be predicted |
| Relies on economic indicators and ability of economists to correctly forecast the future | Relies on price/volume |
| Assumes people behave rationally | Assumes predictable patterns of irrational/emotional human behavior |
| Looks at indicators in an atomistic manner focusing on how each influences price | Looks at price, human behavior as governed by discoverable, universal laws |
| Random Walk | Mathematical proportion and harmony |
| Presumes ability to know/determine that a specific variable, e.g. economic data, caused price to move in a certain direction | Does not concern itself with so called fundamentals but focuses on overarching cyclical trends which influences events and can be predicted in advance |
| Relies on economics, which is a social science rather than a hard science and additionally is beholden to entrenched political and economic interests | Relies on mathematics, physics and geometry which are measurable and only very rarely subject to change (e.g., a new theory). Based on understanding underlying universal laws |
| Commits error of correlation equals causation | Starts with the idea that prices encapsulate fundamental information as well as human emotional behavior. Doesn’t presume to know which piece of data is most important at any given moment. Even more importantly views as irrelevant and a waste of time attempting to pinpoint which “cause” moved price that day |
There is a lot more to all of this than simply fundamental versus technical analysis. Some even break cyclical analysis into its own separate group. Underneath it all are much more profound issues than merely analyzing and predicting price movements. In the end this all leads to how we understand not only the world around us, but matters of space, time, matter and the universe, but we’ll save that for another day.
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Of course nothing is strictly either or, one or the other – the best analysis combines both to a degree. There are events outside of the purely mathematical that don’t fit inside a perfect sine wave or a golden section – random, terrible, irrational events or forces of nature no chart or graph could predict.
Unless that is we are looking at a universal machine working to a fixed routine, governed by a unified theory of everything where the apparently random can be seen for the infinitely detailed fractal event it is.
In which case the answer to life, the universe and everything is clearly and unmistakably 42.
Absolutely. The fundamentalist says technicals don’t matter; the technician says the fundamentals don’t matter.
What would either do with out each other? A technician says it’s only price that matters, yet it is the actions or inaction of others that cause markets to move and create the price action. If there were no fundamentals, I’d beg to argue that there would be to price.
If only fundamentals mattered, then what would explain “momentum” stocks or bubble-like trajectories of IPOs and biotechs where fundamentals simply don’t matter?