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ISSUE 502 | FEB 2006

This month, Lind Plus Senior Market Strategist Stuart Kaufman discusses fundamental versus technical analysis, and how each tool can be incorporated into your trading strategy.

Q: What are the differences between fundamental and technical analysis, and how do I decide which to use when I trade?

A: Lind Plus Senior Market Strategist Stuart Kaufman answers:

The debate between fundamental and technical analysis has raged for decades. It is important to clarify the difference. By definition, fundamentals consist of the economic factors behind a commodity, namely the influences on supply and demand. For example, fundamentals of cotton would include the size of last year's crop, the amount of cotton left from that harvest that is still available for export and domestic use, the pace of exports this year, the progress of the upcoming crop, and projected weather that could affect its growth. These are all fundamentals, and if it looks like a lot of information, it is.

Assuming that one is able to monitor all these factors, the next task is to form a "big picture" of the market and then try to determine how these factors could affect price over the next three to six months. Doing this is a key task in selecting markets that provide the greatest opportunities for profit.

Technical analysis, on the other hand, is the study of charts, chart formations, and an array of technical indicators that affect volume, price momentum, strength of buying or selling, and so on. Because technical trading tends to be more concrete and tangible (e.g., buy when prices hit this line), it attracts both the mathematical and the statistical-oriented crowds. Pure technicians believe all the current fundamentals are always priced into a futures contract at any given time. Therefore, there is no use in studying the fundamentals because they are all reflected in the price patterns.

I think that may be true to a certain extent. Most of the known fundamentals could be reflected in the current price, because fundamental knowledge often lags technical indications of a price move. What the pure technicians overlook is that studying fundamentals is not done to determine how they are impacting the price today, but rather to project how these factors could impact prices in the future.

My opinion is that it's important to be cognizant of both kinds of analysis, but that technical analysis tends to get you in the market quicker and at better price levels.

Stuart Kaufman is a Senior Market Strategist at Lind Plus. If you would like more information about this topic or others, you can contact him at 800-924-1060 or via email at skaufman@lind-waldock.com.

Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.

Futures trading involves substantial risk of loss and is not suitable for all investors.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

© 2006 Lind-Waldock, a division of Man Financial Inc. All Rights Reserved.