Saturday, March 3, 2012

Fundamental Analysis vs Technical Analysis.

Economic fundamentals move price, while price moves technical indicators. So, it is true that fundamentals lead technicals. However, fundamentals can be very confusing.  Are we to not trade until the fundamentals are completely known and understood?

On the other hand, trying to pick tops and bottoms -- getting in early on new trends -- is mostly an act of greed, brought on by the desire to “milk” every possible pip out of the trade.  Picking tops and bottoms is also a guaranteed way to lose, because the spread costs, whipsaws, and stop-loss attacks by bigger money accounts with market-depth information will usually amount to a net loss.

A break in trend does not mean, "Take a new position because something new is happening.” We have to wait and see.  When a break in trend occurs what one needs to do (if they haven’t already done it) is to determine what price level will be convincing that a new trend has developed.  Reverse entry can be attempted when price reaches that level, and not until then.  All the while, trying to make sense out of the fundamentals, in order to determine whether, or not, a trend reversal is justified. Usually, what a break in trend does mean is just to close positions -- taking profit if in-the-money -- otherwise allowing your stop-loss to decide for you -- because something new might be happening.

Technical indicators cannot predict what the market will be doing, but they do show when the market is not doing what it has been.

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