Emerging Money readers may have notice a healthier dose of
technical analysis, especially when talking about currencies. For
years, if not decades, there has been a divide between technical
traders and fundamental traders.
Technical analysis traders rely solely on concepts like
'support', 'resistance', and other studies like
Fibonaccis
, with things like relative strength indicators to make trading
decisions.
Some traders discount technical analysis completely, arguing
charts are just misleading patterns and lines on their screens.
Some simply call it trading mumbo-jumbo. Many fundamental traders
view technical trading as a potential self-fulfilling
prophecy.
The division is caused by a basic misunderstanding of the use
of technical analysis. Technical analysis is designed to provide
a trader with a visual representation of the orders placed in the
market by other traders. Technical analysis coupled with "
candle sticks
" provide the trader with huge amounts of timely information - if
the trader understands how to interpret the chart.
Just using the two most common technical studies terms:
support and resistance, can offer traders a lot of
information.
Support:
is when a stock falls or retraces back to a particular price
level and then bounces higher two or more times.
The misunderstanding:
the stock price bounced higher because the support lines
are there.
Short answer:
The stock price bounced because this where the buy orders
were.
Long answer:
The fundamental data or similar criteria provided
fundamental traders entry points to buy the stock, and this is
the point where technical analysis traders observe a support
line. It's highly useful to know where in the price scheme
traders are willing to buy.
Resistance:
is a similar concept: the direct opposite for tracking sellers.
Resistance is when a stock price has risen to a particular point,
but was unable to push above and retraced lower two or more times
in the past.
The misunderstanding:
Stock price retraced lower because the resistance lines are
there.
Short answer:
The stock price sold off because this where the sell orders
were.
Long answer:
The fundamental data or similar criteria provided
fundamental traders exit points to sell the stock, and this is
the point where technical analysis traders observe a resistance
line. It's highly useful to know where in the price scheme
traders are willing to sell.
Bottom Line:
Technical analysis offers a story behind the price moves.
It provides insight into what traders are doing from a bid/ask
stand point. My mentor walks around telling his traders to
'listen to the charts' as they have a story to tell.
A new modern trader has been coming on the scene. This type of
trader is actually what I consider myself to be, and that is a
trader that combines technical and fundamental analysis to
leverage the bigger picture and reduce risk.