Most traders argue that they only trade technical patterns, others explain how those patterns are based on economic indicators or fundamental news. They are both right, however, we are going to get into this great controversy trying to decide which came first, the chicken or the egg?
To begin with, we will understand technical analysis as “the discipline of trading used to evaluate investments and identify investment opportunities in trends and price patterns seen on charts” (Investopedia.com). In other words, the study of historical prices and volumes. On the other hand, fundamental analysis is “the method to evaluate the intrinsic value of an asset and analyze the factors that could influence its price in the future” (ig.com), with this differentiation it is possible to explore the real value of both types of analysis.
Technical analysis is made up of technical indicators and price action. Technical indicators seek to predict what will happen to the price by analyzing only past information about it, through mathematical calculations (which is how indicators are built) to find opportunity and greater probability in favor of the asset price movement. On the part of the price action, it is basically trying to study the patterns and figures that the price can generate in a certain period.
On the other hand, fundamental analysis has a complete universe of sources that could influence price movement. Starting from the very specific financial data (intrinsic value) of the asset, to the big picture of the local, regional and even global economy. These sources are: economic indicators, geopolitical perspective, fiscal and monetary policy of a country, relative valuation, news, correlation between assets, economic agreements, tweets, etc.
The above shows us how technical analysis mainly seeks to identify a mathematical advantage at the time of making each investment. The decisions that are made are based on that probability, that the price movement is in favor of the trade. On the other hand, in the fundamental analysis, a large part of the relevant information that is publicly exposed is already discounted in the price, that is, the possible impact that this information could have on the price has already had it.
The high liquidity of the markets and the ease of finding publicly exposed information, results in that at the first moment that the news or economic events are public, tens of thousands of algorithms and investors make sure that the price adjusts to the impact of the information. For this reason, fundamental analysis is more relevant when analyzing in the medium and long term, because from that information that is already known, prediction of the possible scenarios in which an asset can move can be estimated.
In other words, both technical and fundamental analysis have significant points to pay attention to. However, in fundamental terms, the potential in the medium and long-term trend is huge, while technical analysts can show details from micro to macro time frames. This is why professional Day Traders prefer technical analysis over fundamental, but also famous big investors like Warren Buffet will only talk about fundamental.
Thus we see how both analyzes help mainly depending on the type of investor you are, and clearly demonstrate that the conjunction of the two gives way to much more robust analyzes and with both mathematical and economic support.
In short, there will always be those who think the egg came first and those who always favor the hen.