Fundamental Analysis and Trading

All our knowledge brings us nearer to our ignorance.

—T. S. Eliot

Fundamental versus Technical Analysis: A Greater Need for Caution

Virtually every market student who has ever relied on fundamental analysis as the basis of a market opinion can recall instances in which his conclusions proved dead wrong. The same, of course, can be said for the technical analyst. However, there is a critical distinction between them. If the technical analyst’s methodology leads to erroneous projections, the same analytic tools will eventually point to an opposite conclusion. In effect, technical analysis is a self-correcting approach. In contrast, the fundamental analyst treads on far more dangerous ground. If the fundamental analyst’s assessment indicates wheat prices should be $7.00 when the market price is $6.00, by definition, he would be even more bullish if prices were to decline to $5.50—assuming the key economic statistics have remained unchanged.

Therein lies the great danger in using fundamental analysis: The more inaccurate the projection, the more adamant practitioners are apt to become regarding the current attractiveness of market positions in line with their original prognostications. Thus, traders who base their decisions strictly on fundamental considerations might find themselves pyramiding positions in those situations they are most incorrect—a blueprint for disaster. In other words, there is a real danger that a sole or near-exclusive ...

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