Smiling proudly at the stock futures exchange, smashing Wall Street! Hello everyone, welcome to the Technology Paradise, I am Lao Zou, the owner of the park.
In the last lesson, we explained the three prerequisites of technical analysis. In this section, let's talk about the comparison between technical analysis and fundamental analysis.
Technical analysis focuses on market behavior, while fundamental analysis focuses on the supply and demand relationships that cause prices to rise, fall, or remain flat. In order to determine the intrinsic value of a commodity, the fundamental analyst needs to consider all relevant factors that affect the price. The so-called intrinsic value is the actual value of a commodity determined according to the law of supply and demand, which is the basic concept of the fundamental analysis school. If the intrinsic value of a commodity is less than the market price, it is called overpriced. You should sell this commodity. If the market price is lower than the intrinsic value, it is called low price, and you should buy it.
Both factions are trying to solve the same problem of predicting the direction of price changes, but from different perspectives. Fundamentalists study the antecedents of market movements, while technicalists study their consequences. Technologists take it for granted that "consequences" are all that is needed and why, why, etc. are irrelevant. The fundamentalists have to get to the bottom of it.
Most currency futures traders either say they are technical or fundamental. In fact, many people do both. Most fundamental analysts have a practical understanding of the basic positions of chart analysis, and most technical analysts have at least a fleeting impression of economic fundamentals (although some technical analysts go out of their way to refuse to know any economic fundamentals). information, known as "technophiles"). The problem is that, in many cases, the predictions of the charts and the underlying analysis are the opposite. When an important market movement begins to emerge, the market often behaves strangely for no fundamental reason. It is precisely at the critical moment of the initiation of this trend that the two paths diverge most. After the trend has developed for a period of time, the understanding of the market between the two is coordinated again. But this time often comes too late, and traders are already unable to make a move.
The two approaches seem incompatible, and market prices always move ahead of even the latest economic information available. In other words, market prices are leading indicators of the economic base, and it can also be said to be a leading indicator of common sense. Before the new development of the economic foundation is revealed by statistical reports and other materials, it has actually taken effect in the market and has been digested and absorbed by the market. Therefore, current prices are actually the result of economic fundamentals that are not yet well known. Some of the most violent bull or bear markets in history began with little data to suggest that the economic fundamentals had changed, and by the time the news, good or bad, came out, the new trend had already rolled forward.
The technical school is often very confident, and when the common sense of the public and the market changes are inconsistent, they can also cope with "everyone is drunk and I am alone". They are happy to be one step ahead, to be in the minority, because they know that sooner or later the reasons will be revealed, but that will be in hindsight, and they neither want nor need to wait and lose their chance.
With the above analysis, it is not difficult for you to understand why the technical school always feels that their set is better than the basic school. If an investor has to choose between the two, the logical choice must be technical analysis. Because by definition, technical analysis already accommodates fundamental factors. If the economic fundamentals are already priced in. Then it is superfluous to study the relevant basic information. Chart analysis takes a shortcut from fundamental analysis, but not vice versa. Fundamental analysis does not include price changes. If it is okay to trade commodity futures loans purely by using technical analysis, it would be very suspicious if someone tries to trade by purely using fundamental analysis regardless of the technical characteristics of the market.
In order to make the last sentence above clearer, we divide the decision-making process into two stages: first analyze the market, and then choose the time to enter and exit the market. The leverage in the currency futures market dictates that timing can make or break a trade. Please note that even if you do not make a mistake in grasping the general trend, you are still likely to lose money. Because the margin required by the currency futures exchange is too small (usually less than 10% of the transaction volume), even if the price changes in an unfavorable direction, investors may be swept out and lose most or all of the margin. In the stock market, the situation is different. If the stock price has fallen, you might as well hold the stock and wait and see, hoping that it will rise back one day. Many stock investors do this, turning from speculation to investment.
Currency futures investors can't take advantage of this advantage. "Buy and see" doesn't work. In the market forecasting stage, either technical analysis or fundamental analysis can be used, but when it comes to choosing a specific time to enter and exit the market, you can only rely on technical analysis. That is to say, as long as you trade, you have to complete these two steps step by step; even if you only use fundamental analysis in the first stage, you still have to use technical analysis in the second stage.
In addition to the above advantages, technical analysis has the great advantage of being applicable to any trading medium and any time scale.
The principle of chart analysis actually originated from stock market analysis, and was later transplanted to the currency futures market. Therefore, whether it is stock trading or commodity trading, there is no useless place.
For example, when doing commodity currency futures, the chartist can track many types at the same time as he likes, while the fundamentalist tends to focus on one thing and lose the other. The data on economic fundamentals are so complex that most fundamental analysts have to stick to one or a certain type of commodity, such as grains or metals. We must not ignore this difference.
Let's just say this one, the market can sometimes be flat, sometimes climax, there are clear trends, and there are periods of chaos. Technologists might as well concentrate their energies and resources on markets with good trends, and ignore others with unclear trends for the time being. In this way, various commodities in the market take turns to be dealers and become active alternately, and the technical school then shifts its attention and funds to the most fashionable objects. There are always different products that are the most popular at different times, and the trends are beautiful, and they often come one after another. Technical analysts are big enough to rotate new favorites according to the situation. The basic school is mostly "experts" and often does not enjoy this flexibility. Even if they want to imitate others, they have to spend a lot of extra time to grasp new objects, which lacks the chicness of the graphic school.
Another advantage of the technical school is that they can "see both the trees and the forest." They can track all the markets at the same time, and have a good grasp of the commodity market as a whole, avoiding the tendency of "seeing the sky from the bottom of the tree". fault. Moreover, there are internal links among many currency futures, and they will also respond to similar economic factors. Therefore, they can be clues and refer to each other in price changes.
In addition, the principles of technical analysis are also useful in hedging (spread trading) and options trading. In addition, commercial value preservation also needs to consider the future trend of prices, so technical analysis can also play its strengths.
Another advantage of chart analysis is that it can be applied on different time scales. Whether it is studying price changes within one day for day trading, or following the trend for medium-term follow-up trading, the same principle can be used. Longer-term technology forecasts are still often overlooked at present. Some people say that chart analysis is only suitable for short-term time frames, which is nonsense. There are also people who say that basic analysis is suitable for long-term forecasting, while technical analysis is better for short-term timing. The use of weekly or monthly charts has proven equally useful for long-term forecasting problems.
As long as you fully understand the technical principles discussed in this course, you will be able to use both in various trading instruments and on various time scales.
Many people think that technical analysis is relatively remote and narrow, or understand it as a highly specialized tool for stocks and foreign exchange futures. In fact, its basic theory can be applied to the prediction of the economic situation, but the prospect of this aspect has not been fully recognized so far.
Technical analysis predicts the future trajectory of financial markets. Are these forecasts useful in forecasting the economy? See this Wall Street Journal article from more than thirty years ago: "Bond Prices Rise Fast, And Historically A Good Leading Indicator of Economic Turnings" (September 28, 1982 ). The article uses an extensive historical record to strongly suggest that bond prices are a strong precursor to economic downturns or upturns. The author writes: "It is significantly better than stock prices as a sign, and as it stands, it is also much better than various official leading indicators." We note that stock prices are also mentioned in the quotation (the S&P 500 stock average price index is One of the 12 leading economic indicators that the circle pays attention to at any time). The article cites a research report from the Massachusetts National Institute of Economic Research proving that the stock index performed best among the 12 leading indicators. I want to emphasize that now that we have bond currency futures and S&P 500 currency futures, and technical analysis can handle both currency futures with ease, then, whether you realize it or not, when we When they are technically analyzed, the economy is also successfully analyzed at the same time. Here is the most vivid example. In the summer of 1982, a violent bull market erupted in both stock indexes and bond markets, just in time to announce the end of the longest and most painful Great Recession since World War II—and before that, the technical analysis party It had been predicted for a long time, but fundamental analysts were almost unaware of such a major turning point at the time.
New York's Coffee, Sugar and Cocoa Exchange (CSCE) has applied to open currency futures contracts on four economic indicators, including housing starts and the Consumer Price Index for Workers (CPI-W). The CRB index has long been seen as a barometer of inflationary pressures, but the use of this index is much more than that. As early as 1984, there was an article in the Commodity Yearbook, which compared and studied the relationship between the CRB index and various economic indicators since 1970.
The study shows that the cRB index has a strong correlation with the industrial output index, and that the commodity price index generally leads changes in the latter. There is the original text as evidence: "The cRB index has a high correlation with the industrial output index, indicating that the cRB is a very reliable general economic indicator.", may wish to add that we have used charts to analyze the cRB index for many years, and we have done a good job pretty.
Based on the above, it can be clearly seen that technical analysis is a valuable forecasting tool, and research on the price trend of varieties such as gold or soybeans is just a small test. Of course, it should also be clear that although technical analysis has great prospects in predicting general economic trends, it has yet to be exploited.
Having said that, you may have noticed that sometimes I use chart analysts and sometimes technical analysts. Is there any difference between them? Also, is the analysis principle of technical analysis in the stock market and the currency futures market the same? In the next class, Lao Zou will answer you one by one.
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