It’s Time to Combine Fundamental and Technical Analysis for a Total Game Plan
By: Louis B. Mendelsohn
President, Market Technologies
Over the past few years futures traders have emphasized technical analysis as the primary, if not exclusive, basis for making trading decisions. This single focus creates a serious knowledge gap among traders regarding basic economic and fundamental factors that affect futures prices.
A technical rather than fundamental approach has been reinforced by the proliferation of trading software that can compute every known technical indicator in the alphabet from “ADX” to “Williams %R.” These software programs have become so sophisticated that futures traders can now design and test their own trading models based entirely on historical price simulation, find the “optimized” model to use for each market, and generate daily buy/sell signals, all without regard to underlying economic or fundamental forces that drive the markets.
The stock market crash of October 1987 has forced some traders to begin to look at economic reports affecting the dollar, bonds, and stock indexes. Still, many traders limit themselves to once-a-month quick glances at the merchandise trade or unemployment figures, content to rely on technical analysis and their computer’s “number crunching” as the basis for making trading decisions.
This knowledge gap now gives those traders who do pay close attention to both fundamentals and technicals a real trading advantage over strict technicians. In today’s complex world of global markets and increased intraday price volatility, a narrow technical approach to trading without consideration for the broad economic and fundamental factors, is no longer sufficient.
Traders need to go back to fundamentals; but not to the exclusion of technicals. What’s needed is a combined approach that recognizes the role that fundamentals play in presaging the timing of price direction changes in the futures markets, yet provides a disciplined technical basis for making daily buy/sell trading executions.
A trading plan that does otherwise would be like a military plan for fighting a conventional war in which the infantry is sent to the front line without airborne support to provide the necessary cover. It’s just not a prudent way to engage in modern warfare. Nor is a rigid adherence to technical analysis without regard for underlying economic fundamentals the way to prosper in today’s volatile markets. Seasonal patterns, particularly in the agricultural markets, (long ago recognized by such prominent futures experts as Jake Bernstein and the late Edward Gotthelf) support the argument that fundamentals, the dictating factors behind price levels and changes in direction, are a force to reckon with. The old cliché “don’t fight the trend” really should say “don’t fight the underlying fundamentals.”
Several recently developed programs help boil down the maze of economic and fundamental information into a form useful by traders who do not have formal training in economics.
These programs help track the impact that economic indicators have on price direction in the various markets. Such software gives individual traders an easy-to-understand link between fundamental/economic data and price activity that they can put to immediate and practical use, without being burdened by overly complex econometric modeling approaches that are probably best left to economists.
Perhaps as the return to fundamentals picks up speed, traders who still rely only on technical approaches will start to pay more attention to the impact that economic and fundamental indicators such as the merchandise trade deficit, unemployment, and commodity supply/demand data, have on price direction in the futures markets. Then trading decisions could be made in a disciplined, consistent manner but without ignoring major fundaments influences.
This would give traders a better chance at improving their own bottom-line performance and a decided advantage over others who insist on sticking to more restricted ways of analyzing market behavior.