Trading is more art than exact science. If a trading technique could beat the market consistently, the value would be immeasurable.
Honestly, there is no one right way to trade…successful tactics may only work under certain market conditions. Discipline is key regardless of your approach.
The Two Major Camps of Trading Technique
Market prognostications fall into two camps of analysis. Fundamentals focus on facts and Technicals are based on price action. Passionate disciples defend each school of trading technique.
The key is to discover the analysis approach that fits your trading personality and develops the skills to identify trading candidates and manage them to produce profits.
Concrete numbers in corporate sales and profit tell us the fundamentals of a stock. Some may argue that those facts are why the price is where it is…not where it is going.
Company data analysis is extensive – focusing on price to earnings ratios and cash flow to determine the health of the corporation.
How that translates into the stock price is not a direct relationship. For example, a company can lose money and have the stock price rise.
Human emotion often drives the price action that may disconnect from the fundamentals. Eventually, the fundamentals will override fads or fears, but it may be a long and expensive journey to be right.
Technicals, on the other hand, reflect the buying and selling opinions for price discovery. Whether chart patterns are predictive is questionable BUT if enough traders follow a certain approach it can become a self-fulfilling prophecy.
Chartists believe that all market facts are already priced in with little value in helping to identify the next move. They instead watch how price acts and reacts at specific levels to make their trading decisions.
So Which is Right?
A winning formula is often a healthy combination of fundamental and technical analysis to make trading decisions.