The fi​r​st thing you will lea​rn as soon as you sta​rt your edu​ca​tio​nal jou​r​ney in the tra​ding wo​r​ld is te​ch​ni​cal ana​lysis. Te​ch​ni​cal ana​lysis, as a tra​ding te​ch​ni​que, tries to pre​di​ct fu​tu​re pri​ce move​men​ts ba​sed pu​re​ly on past ma​r​ket data.

Te​ch​ni​cal ana​lysis fa​na​ti​cs advo​ca​te that, in or​der to make favou​ra​ble pre​di​ctions about the fu​tu​re, the​re is no​thing else you need to know about the wo​r​ld exce​pt the past pri​ces and vo​lu​me. Acco​r​ding to them, you can lock you​r​se​lf in a room, sta​re at the cha​rt of any asset pair and make a pro​fit ba​sed on some pre​de​fi​ned ru​les and gui​de​li​nes. You do not rea​lly need to know an​ything about the con​te​xt in whi​ch the tra​ding is ta​king pla​ce. All in all, not much of a di​ffe​ren​ce from a ta​rot card rea​ding.

The​re are two rea​sons why this trend is do​mi​nant espe​cia​lly in the re​tail tra​ding in​du​stry - it’s easy to pra​cti​ce and cheap! The most va​lua​ble re​sou​r​ce when it co​mes to tra​ding and inve​stment is in​fo​r​ma​tion and in​fo​r​ma​tion has a pri​ce tag. Te​ch​ni​cal ana​lysis does not re​qui​re much of it. Just past pri​ces whi​ch are then fed into some of the ga​zi​llions of avai​la​ble in​di​ca​to​rs and pa​ttern de​te​cto​rs out the​re and here you go - you have a fo​r​tu​ne te​ller! When the in​di​ca​to​rs sta​te is X then it’s be​tter to buy and when the in​di​ca​to​rs sta​te is Y, your best bet wou​ld be to sell. Fo​llow the re​ci​pe and you will be su​cce​ssful! At lea​st that is what the theo​ry says...

The other side of the na​r​ra​tive is to use fun​da​men​tal ana​lysis. You will hear about fun​da​men​tal ana​lysis in the in​t​ro​du​ction part of nu​me​rous avai​la​ble tra​ding cou​r​ses but more or less that’s it. Fun​da​men​tal ana​lysis is hard for in​t​ro​du​cto​ry cou​r​ses to dive into. It is much more than tra​ding the GDP and the NFP. It re​qui​res a deep kno​wle​d​ge of the un​der​lying in​du​stry and the re​levant fo​r​ces that drive it. This means acce​ss to a lot of in​fo​r​ma​tion whi​ch is time-con​su​ming to ga​ther, hard to in​ter​p​ret and so​me​ti​mes co​stly, i.e. acce​ss to a Bloo​mberg Ter​mi​nal.

It also re​qui​res a cer​tain edu​ca​tio​nal ba​ckg​round to be able to tran​sla​te the in​fo​r​ma​tion into in​si​g​hts about the fu​tu​re. For exa​mple, you need to have a so​lid ba​ckg​round in eco​no​mi​cs and fi​nan​ce. It is a form of ana​lysis not ea​si​ly acce​ssi​ble to ama​teu​rs, hen​ce it is ski​lfu​lly ski​pped when trai​ning en​try-level re​tail tra​ders. A co​mmon advi​ce a re​tail tra​der will get when tra​ding is “Don’t tra​de the news”. This is just a di​s​gui​sed ver​sion for “Don’t tra​de so​me​thing you do not un​der​stand”.

Whi​le te​ch​ni​cal ana​lysis is not use​le​ss per se, on the con​t​ra​ry, it is an exce​llent tool as it is ba​sed on so​lid be​haviou​ral eco​no​mi​cs, it is also dan​ge​rous when used out of con​te​xt. In the pan​de​mic era, the need for un​der​stan​ding the fun​da​men​tal fo​r​ces of the eco​no​my be​co​mes more pro​mi​nent and hi​g​hli​g​hts the impo​r​tan​ce of fun​da​men​tal ana​lysis. If you have been tra​ding sto​cks, in​di​ces or co​mmo​di​ties du​ring this pe​riod, only using te​ch​ni​cal ana​lysis, then you pro​ba​bly haven’t done so well, sin​ce it is li​ke​ly that you have re​ceived nu​me​rous fa​lse si​g​na​ls.

The​re is not much a sto​cha​stic in​di​ca​tor can tell you about a pri​ce war be​tween the Sau​dis and the Ru​ssians, or a MACD about the Sino-Ame​ri​can tra​de di​spu​tes or the re​cent ma​r​ket-di​s​ru​ptive Tru​mp twee​ts. To make sen​se of what is ha​ppe​ning on a cha​rt, you need to look be​yond it and un​der​stand what is going on in the wo​r​ld no​wa​da​ys. You need to know a bit of ever​ything - eco​no​mi​cs, geo​po​li​ti​cs and even a bit of epi​de​mio​lo​gy.

A ra​tio​nal tra​ding st​ra​te​gy shou​ld alwa​ys be a mi​xtu​re of fun​da​men​tal and te​ch​ni​cal ana​lysis. My per​so​nal pre​fe​ren​ce is to esta​bli​sh a long term trend, ba​sed on fun​da​men​ta​ls and tra​de this trend using te​ch​ni​cal ana​lysis to find good en​try poin​ts. For exa​mple, in a wo​r​ld that is gra​dua​lly reo​pe​ning from lo​ckdo​wns, ai​r​po​r​ts re​su​ming ope​ra​tions, peo​ple going back to work and plan​ning their va​ca​tions, OPEC+ cu​tting oil pro​du​ction and the ma​r​ket hea​ding to​wa​r​ds a su​pply de​fi​cit, don’t sho​rt oil no ma​tter what an in​di​ca​tor te​lls you. Just don’t!

Wri​tten by: by Pa​na​gio​tis Cha​ra​la​mpous, Head of Co​mmu​ni​ty Ma​na​ge​ment of cT​ra​der at Spo​twa​re.

Also pu​bli​shed on fxst​reet.com