It used to be the case that fundamental analysis was the be all and end all of market speculation. All the famous traders, all the up and comers and everyone else in-between considered themselves a fundamental analyst. Technical analysis was a myth, a load of nonsense dreamt up by traders who couldn’t get fundamental analysis to work for them.
That seems a long time ago now doesn’t it? All you ever see now if you’re looking for trading strategies or trading advice is indicators galore and chart patterns left right and centre. We’ve gone full swing to the point that the standard retail trader doesn’t use fundamental analysis at all. In fact the closest they get is checking an economic calendar to make sure they aren’t opening any trades during a major news release. Even if you try to find some information out about fundamental trading it’s hard to come by and it seems to be limited to large funds and institutions only.
So is it safe to say that fundamental trading is a thing of the past? Are traders right to completely ditch fundamental analysis or is there room for it in your trading plan?
As with all things the truth lies somewhere in the middle. It was absolutely right that traders started opening their minds to technical analysis because clearly it works and it also adds a totally different dimension to trading. By stubbornly refusing to even give any consideration to it traders were really shooting themselves in the foot. That being said, to totally ignore fundamental trading now is to potentially make exactly the same mistake. The fact that it worked for all those years for many well known and successful traders tells you that it can work. Indeed, you could make a strong argument that fundamentals are still what essentially drive the market so learning what the big economic releases mean and understanding other major fundamental factors can surely only benefit you in the long run.
So how can we have the best of both worlds? In my experience the way to mix the two major types of analysis into a coherent trading plan is to use fundamental analysis to establish a bias in the market and to use technical analysis to find a safe trigger point in order to take advantage of it. If for example you’re pretty sure the market’s going to go down based on some key fundamental factors, you might think the obvious thing to do is open a sell in the market at the current price. In some cases it could well be but using technical analysis we can now look for a chart pattern, turning point, candlestick pattern or whatever it is that you like using in order to find a low-risk entry into the market, and we can also use some basic technical analysis to set a logical stop loss level and a logical target level. Trading in this way means that we have two factors working for us in our trades rather than just one so if we do it correctly we should be able to develop an even bigger edge.
The point of this article isn’t to say that we should all be learning fundamental analysis but rather to demonstrate that there’s still potentially a place for it and I wouldn’t write it off as a viable trading strategy just yet.