action itself, and as such, its use is more appropriate when
traders are looking to comprehend the emotional swings and
roundabouts that all the fundamental forces contribute to but,
in anything other than the medium to long term, rarely dominate.
While the fundamentals are real and remain the underlying
driving force, in the context of daily, weekly, monthly, and
even quarterly profit reporting, only technical analysis gives you
not only a handle on the forces at work in real time but also a
reminder of the truly dominant fundamental force. The term
dominant fundamental force is used because this captures what is
the greatest weakness of fundamental analysis and the greatest
strength of technical analysis. At every point in time, as discussed
already, there are both bullish and bearish fundamental
arguments and forces at work. As there are no clearly assigned
weights to any particular variable, which is the more powerful is
extraordinarily difficult to quantify on paper.
The only way to deduce the dominant fundamental bias in
real time is to study the price action using technical analysis—in
particular, the big-picture view provided by a long-term chart of
the market’s price action. By long term, I mean a chart showing
the price action for at least the previous 10 years. While five-year
charts down to hourly charts all have their place, an awareness
of the long-term levels is essential even for the day trader.
From looking at the long-term charts, the dominant fundamental
shifts should become self-apparent. What should be particularly
clear is the extent of the volatility—that is, the swings
and roundabouts around the underlying trends. Again, this is
where technical analysis comes to the fore. It can allow you
to monitor and understand—and even sometimes foresee—the
extent of a correction or fresh trend.
In effect, while fundamentals drive markets, technical analysis
allows us to trade in markets. The fundamentals of the modern
world are simply too vast, too complex, and too rapidly changing
for anyone to be able to understand it all in real time. Further, it is this real-time
understanding that is essential in both successful forecasting and trading.
There is a further analytical skill that comes only with a long period of experience:
intuition. There is no doubt that those who can intuitively read the market
are the true warriors. The scope of this book, however, is to help
with the development of skills that will, with time, lead to the
experience and refinement of that elusive quality of intuition.
Markets, at least in the short term, are operating largely out of
emotion, which is the domain of technical analysis and which is
also the time horizon in which most traders are interested.
Read More: EMOTIONS AND THE USE OF FUNDAMENTAL VERSUS TECHNICAL ANALYSIS
