Today I received an interesting email:

"Hi Markus,

My research indicates that Japan is the single largest investor in US Treasury securities to the tune of some 25% of a foreign holder. In view of the the fact that the invasion of Iran is pending & a possible oil price rise to $250/B ( CEO Gazprom) what is the likelyhood that Japan will call for early redemption?"

My answer: I don't know. I am a technical trader and not a fundamental analyst.

The main difference between a fundamental analyst and a technical analyst is as follows:

The fundamental analysts looks at micro- and macro-economic data to determine whether the price of a financial instruments is overvalued or undervalued. As an example, he might look at the following data when analyzing a stock:

• Financial statements for the company,
• The current financial strength,
• Future growth and profitability prospects,
• Current management skills,
• Patents and Research and Development projects,
• Annual and quarterly earnings reports,
• The economic, political and competitive environment facing the company,
• as well as any current news items or rumors relating to the company's operations.

In other words, fundamental analysis is the study of basic, underlying factors that affect the supply and demand of the financial instruments which are being traded. Fundamental analysis looks at the CAUSE of market movement.

On the other hand, the technical analyst assumes that the current price of a financial instrument such a stocks or commodities already discounts all this information.

In summary, there are three main points that a technical analyst applies:

1. The market action discounts everything.
   Regardless of what the fundamentals are saying, the price you see is the price you get.
2. The price of a given security moves in trends.
3. The historical trading patterns of a security will tend to repeat.

I believe in technical analysis for a couple of reasons:

• The markets are driven by greed and fear, and not by supply and demand. An economic report itself is meaningless: it is traders’ reactions to the report that moves the market.
  .
• Price data is more “objective.” You can interpret financial data and economic reports any way you want, but support levels are support levels, and a weekly high is a weekly high. It’s easier to interpret hard facts more than financial statements, because many times these statements might be misleading.

  .
  Example: IBM announces that it will meet the projected sales targets, and the shares drop like a rock, because traders hoped that IBM would exceed its goals. Another day, DELL announces that they will meet their targets, and the shares jump up, because traders didn’t believe that DELL would make it due to the “difficult economic environment.”
  .
• It’s easier (and therefore faster) to learn technical analysis. You can learn the basics by reading a couple of books, whereas you need to study micro- and macro-economics to master fundamental analysis. And even then, you might be fooled by the market.

But does this mean that technical analysis is better than fundamental analysis?

Define "better"! For my friend who sent me the email above it might be easier to conduct research on fundamentals, and there are many traders out there who achieve their trading goals by using fundamental analysis.

For other traders it might be easier to read charts instead of financial statements, and they are more successful doing this.

I encourage you to at least try both methods and then decide which one is better for you. And that's easy to decide: It's the one that's more profitable for you.

Enjoy your weekend!