CFS Futures

Fundamental & Technical Analysis

Introduction to Chart Analysis The following is a brief background of the history and concepts regarding the foundations of technical analysis. To know about technical analysis requires that one first understand fundamental analysis.

FUNDAMENTAL ANALYSIS: When attempting to forecast commodity price movement, many people make the mistake of relying on day-to-day belated information from the mainstream media. An evening news report about mid-western flooding, a radio blurb from an analyst regarding the near-term direction of interest rates, or even a "hot" tip from a third-cousin-twice-removed about a parasite infecting cocoa in Africa, are all examples of "fundamental" market information. A person who makes an attempt to forecast a future price movement through the assessment of supply and demand factors is called a "fundamentalist." As with any methodology of analysis, there are flaws to fundamental trading, especially for shorter-term traders. Many people seem to forget that BREAKING news is now a world-wide event. Information is sent via: television, satellite and the Internet at instantaneous speeds. People world-wide are all getting the same information at the same time and are able to make Investment decisions instantly. Central banks, multi-national conglomerates, and global financial institutions have undoubtedly received the "news" and acted on it long before the mainstream press reported it to the public. The "BIG" money traders employ literally millions of people, and spend billions of dollars in technology to keep an up to the second assessment of world events. Thinking that one can act first, and make a trading decision based on public, out-dated information, will almost certainly guarantee failure. This isn't to say fundamentals are meaningless, they just aren't as relevant for a shorter-term trader. Long-term trends that last for several months to years can sometimes be accurately forecasted by a savvy fundamentalist, and there are many professional traders who incorporate fundamentals into their trading. The problem is, most average traders don’t have the focus to maintain a distant time horizon, and they allow the day-to-day fluctuations to alter their original conviction on market direction. Others won’t allocate enough time and energy to researching, digesting, and absorbing all the relevant materials. If there were a way to conveniently combine all information, and view it graphically to identify patterns, wouldn’t market forecasting be easier?

TECHNICAL ANALYSIS: Technical analysis is a price prediction method founded in the belief that current prices represent, and are derived from all known information about a commodity. If people buy and sell based upon knowledge acquired through whatever means, then one could argue that prices themselves are a reflection of all market participants and their corresponding knowledge. Not only do prices reflect intrinsic facts, they also represent human emotion and the pervasive mass psychology and mood. Prices are a function of supply and demand, and human emotions…fear, greed, panic, hysteria, elation, etc. Markets may move based upon people’s expectations, not necessarily facts. A market "technician" attempts to disregard the emotional component of trading by making his decisions based upon recurrent price chart formations. Technical Analysis has existed for centuries; it was used in the "Tulip Bulb" mania in Holland in the 1700's and records exist showing the use of price charts (Candlesticks) by ancient Japanese traders to determine market direction. Even in the modern era, many people have amassed enormous fortunes utilizing Technical Analysis. Charles Dow, the founder of the Dow Jones Averages, developed the now famous Dow theory, which analyzes markets through the study of price charts and patterns. Clearly, the effectiveness of studying prices cannot be disputed. A technique such as Technical Analysis is only as good as its interpreter. As with many techniques of analysis, there is always room for numbers and graphs to be interpreted in a different manner. It takes patience, discipline, and practice to develop your own personal trading and analysis style. Take care to find a system or method that you are comfortable with, because otherwise you won’t have confidence in your trades. There are numerous techniques, indicators, and variations on chart interpretation, but not all will be suitable for every trader. We can help you fine-tune a methodology that works well for you.