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Trading Education Posted by Team Topstep February 8, 2021

The False Dichotomy Of Technicals vs. Fundamentals

Remote Traders On Their Laptop

Whether you have been around trading for a long time, or if you are entirely new, you have likely uncovered the dichotomy represented between technical and fundamental approaches to trading. This dilemma has existed for years, with some people gravitating toward extreme views. 

Try To Mix It Up

I once knew a trader who was probably the most intelligent and educated person I have ever known. This trader could analyze the market fundamentals with the best. Fundamental analysis was her profession. Her institutional employer loved her work but hated her trading. Why? Because she only took a fundamental view and paid no attention to other market behaviors and patterns. She was often correct in her broader thesis, but unfortunately, her trades often failed because the entries were undesirable. 

Then there was another trader I knew who had paid a handsome amount of money for various technical analysis training. He picked up the art very quickly and produced successful trades in a relatively short amount of time. However, it often perplexed me how his training informed him to disregard news and fundamentals altogether. As good as his technical skills were, he would often get into trades just ahead of major news events, not even aware of what was on the horizon. Therefore, he was unable to manage his position to the higher volatility events. 

After three years, when I eventually revisited this trader, he told me that he figured out what was missing from his trading. He said that the element that took him from being just profitable to trading full-time was more attention to markets’ fundamentals. 

The general population tends to gravitate toward many social extremes, but we often develop something pragmatic as traders. In our vocation, philosophical agendas are secondary; what matters is if we are catching the market trend or not. While some set up a false dichotomy between technicals and fundamentals, I’ve found that the traders with profitable longevity tend to focus on both. In other words, it’s not an either-or proposition but more of a both-and. 

Technical Trading

The world is full of data regarding technical trading. Before the internet was widespread, there were countless books on technical analysis. Since the internet age, there are heaps of material and many websites with paid classes promising to aid the trader’s learning curve. Simply put, technicals are an assessment of price history and patterns that often repeat. How often they repeat is subjective. Sometimes, there are bullish and bearish technical patterns in a market, both in play, depending on the time frame and other considerations. 

Technicals are the only one of the three methodologies that I present today that can stand alone. However, we all are probably aware that success requires much more than knowledge of technical patterns. Elements such as money management and trader psychology are often the difference between two traders with the same tools, identically assessing the market, but with different profit-loss outcomes. 

Because technical analysis is so widely used and material is very accessible, I won’t spend much time on this section. 

Fundamental Trading

A simple way to view fundamentals is as the economic principles behind the supply and demand process. The most accessible example comes from the most recent twelve months. When COVID19 became a global problem, it generated an overall fundamental effect. In many parts of the developed world, unemployment rose because companies were either tightening their belts. Their industry was hard hit or compensating for the unknowns or were going to essential personnel to avoid a virus breakout at business locations. 

Travel industries were primarily affected as the demand for airline tickets, vacations, and gasoline plummeted. Retailer businesses were hit hard because customers were not frequenting those locations. The companies with robust online ordering and delivery fared well, while the rest had to quickly develop and implement this type of service. 

Recent Examples

The economic scenarios surrounding COVID19 are numerous but serve as examples of fundamental factors that maintain the financial infrastructure that is measured regularly. Every month, nations will release pertinent data concerning employment, GDP, and other crucial elements, while individual companies will report earnings and relevant data every quarter. These reports are essential to stock markets, currencies, and some commodity markets like crude oil and gold. 

However, other commodity markets are a bit more complicated. Take, for example, soybeans. Beans did suffer an initial effect of lower demand due to COVID19 but came storming back, especially in the second half of 2020 when demand increased from China. This rally in beans was also assisted by a weaker dollar trend late in the year. Even though the technicals said beans were well overbought, the fundamentals suggested that the movement would be too strong to fade.

Another fundamental factor in a market like beans is the weather. The bulk of soybeans are grown in the midwest and South America. Weather can be an indication of global supply, which will affect prices in the United States. Alternatively, if you are trading cotton, then the weather patterns in the U.S. southeast will be of importance.

All of this may sound complicated, but understanding the many terms and hundreds of technical indicators is also hard to digest upon initial serving. Any methodology requires repetition to learn and incorporate. Fundamentals are not a stand-alone indicator, but they do demonstrate the overall weight behind the markets. However, technical tools are essential to timing when to enter and exit trades based on fundamental data. 


One extra analytical tool that I will inject into this conversation is that of seasonal behavior. Seasonality incorporates both technical and fundamental concepts. This method evaluates an asset’s price performance over the various periods of a year, detecting patterns. Because it engages price history, it is technical; however, there are often fundamental reasons why the markets have a specific seasonal pattern. 

One fine example is crude oil futures. There is a natural tendency for specific periods of the year to increase and decrease supply/demand due to high transportation seasons. Meanwhile, natural gas, which is used primarily in heating, often has patterns depending on the seasonality. Seasonality is highly applicable to commodities because they tend to go through a supply/demand cycle.

Still, it is also beneficial to forex trading where currencies, depending on the underlying economy, also tend to peak at specific times of the year. Perhaps the most well-known example of seasonal behavior applies to equity indexes where the adage is oft-repeated, “sell in May and go away.” This adage is for a good reason, not because it proves true every year, but because traders who use less risk over the slow summer months and then the volatile Autumn period have often benefited. 

I will be clear that seasonality is not a stand-alone indicator at any time. Still, I have found that when the fundamentals are relatively normal and the technicals are at least neutral, seasonality might be the best indicator. 

Develop Your Own Approach

One thing you should be aware of is that different markets behave in various ways. Some markets trade very technically, while others don’t seem to regard price history and patterns very closely. The same goes for the other techniques as well. It would help if you discerned how your market(s) interact with all of these analyses. For example, if you trade the stock index futures, fundamentals have been less applicable over recent years. Still, if you are trading commodities and forex, then fundamentals have been more pertinent than technicals. 

Meanwhile, some of these concepts are much more appropriate when considering longer-term trades. Most readers here may trade in shorter time frames; however, I have found the benefits of having a portfolio for intraday trading and another for swing trading.

Any of these individual approaches take time to learn and then to master. The same is valid for developing a system that utilizes all of these methods of market analysis. 

Let’s be frank, technicals, fundamentals, and seasonals are imperfect ways to assess the market; in other words, none produces a system that makes money on every trade. However, a blended style chooses to incorporate the best of each of these techniques. When these are combined, they don’t work in contrast to each other but can harmonize to provide you a clearer picture of market expectations while filtering out some of the weak signals from a stand-alone method. Of course, even this blended approach carries its flaw, and this is why other functions such as money management are crucial to any trading strategy. Be sure to keep the conversation going in the comments section, and until next time, happy trading!