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The "Fundamental Versus Technical Analysis For Commodities Trading" article examines and elaborates upon fundamental and technical analysis techniques for commodities and futures contracts with special emphasis differences.
Fundamental analysis concentrates on the economic factors of supply and demand and how they cause prices to move higher, lower, or not at all. Technical analysis focuses on the study of price movements.
Fundamental economic forces
When viewing a commodity market fundamentally, the investor analyzes all of the pertinent economic forces affecting the commodity in order to determine its true value. Dependent upon the laws of supply and demand, the fundamentalist will determine a commodity's proper value. It examines all the factors affecting the commodity price and then determines its real value. If this true or intrinsic value is below the market price, it represents an opportunity to buy. Conversely, if this true or intrinsic value is above the market price, it represents an opportunity to sell.
Technical viewpoint of the commodities market
Technical analysis of the commodities markets is the study of market action, mainly through the use of charts and indicators to forecast the future price of a commodity. The three principal focuses for a technical analyst are price, volume and open interest. Primary to technical analysis is the belief that the price of any commodity reflects all available information (economic, political and psychological) in the market. Technical analysts do not dispute that any price movement has a fundamental cause. Prices rise when demand exceeds supply. Prices fall when supply exceeds demand. They contend that if all available information is already reflected in the price, then the study of the market price is all that is necessary to determine its future movement. History will always repeat itself.
Similarities between the two analysis techniques
The goal of each of these analytical techniques is identical. They, in essence, want to accomplish the same thing. That is forecast the direction prices are going to move in the future. The methods they utilize are what distinguish one from the other. Market movement causes are the basis of fundamental analysis. Historical price movement studies form the basis of technical analysis. Though claiming to be mutually exclusive, most technical analysts have a working base knowledge of fundamental principles. At the same time, the vast majority of fundamentalists are familiar with the indicators used in technical analysis. The individual investor must find the technique he is most comfortable with. Many successful investors use one or the other exclusively. Similarly, there are success stories based on a combination of both methods.
Confronting different indicators
If life was simple, each of these techniques would confirm and complement each other. In reality, they are often at complete odds. This usually occurs at the beginning and reversal of a significant market trend. Fundamental analysis will often not support and confirm a trend reversal that has been clearly signaled by technical indicators. Over time, however, the two systems converge and offer the same view of the market.
Technical analysts believe that all available information to a market is reflected in the price of the product of that market. As market price is determined by supply and demand, all the information used by fundamentalists is already reflected in the price as viewed from a technical standpoint. Technicians, thus, believe that fundamental analysis techniques are redundant. Chart analysis of prices becomes a short-term form of fundamental analysis.
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