There are two basic types of analysis used to evaluate the market and predict its movements: fundamental and technical. If you’ve dealt mostly with stocks and bonds, you may rely heavily on fundamental analysis to guide your market decisions. Futures traders have learned to follow the money. Technical analysis trumps fundamental analysis when making trading decisions in the futures market. Read on to find out why.
Fundamental analysis is an analytical method that considers only a company’s sales, earnings and assets. This theory holds that market activity can be predicted by looking at
- relative data and statistics,
- company management and
- company earnings.
Fundamental analysis is generally based on reports, reports written by humans trying to paint a specific picture of the company. And therein lays the problem of fundamental analysis. The “facts” are presented through a filter — often a marketing filter — so you get a biased view of what is happening. Because futures traders trade the market, not individual stocks, fundamental analysis has limited use and then only as background information. Fundamental analysis can be useful in helping you understand the nuts and bolts of the industry behind your trades, but not in making daily trading decisions.
Technical analysis is the study of prices. Traders realize that the price of a commodity already reflects
- opinion, rumor and news,
- volume,
- volatility, and
- fundamentals.
Trading price and sometimes volume are the basis for the charts and modeling techniques futures traders use to identify market price trends. As they say, “A chart is worth a thousand numbers.” Charting is a way of seeing what the numbers are doing. By analyzing charts, traders can identify uptrends, ranges, reversals, downtrends, etc. Futures traders base their trading decisions on these analyses of price trends.
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