Day Trading & Forex Forum

Part of the learning process is for you to understand the different types of traders. In essence there are two, and these are a fundamental trader or a technical trader. For you to succeed as an online trader you must understand the differences. Both have very different views in the techniques they use to assess market conditions and the direction an instrument may take. 

Whilst there is some overlap, these are two very distinct methodologies, and you need to be comfortable with one or the other. You will come across this terminology all the time. Whilst there are huge differences in the approach, it is safe to say that most large financial institutions now employ both methods as both have their strengths and weaknesses. Fundamental also applies to the broad economy such as GDP, exports, imports etc. As a forex trader I use both in my trading, but with an emphasis on technical trading.

Technical or Fundamental: The Trading Approach
As we have seen, the two schools are called FUNDAMENTAL and TECHNICAL and for the record I am primarily a technical trader. In a nutshell, the fundamental trader believes that a share's performance is based on the fundamentals of the company ( hence the name ) such as PE ratio, profit/loss, balance sheets, management, ratios, business forecasts - the sort of information that is contained in a small forest of paper provided  to shareholders. The technical trader however believes that the future performance is based purely on one simple piece of information, namely the price chart for the instrument. They believe that all the information about a company's performance is encapsulated in this simple chart. This is not an unreasonable assumption since the price reflects past performance, and is dictated by market conditions throughout the trading day. ( You may also hear the term chartist - this is the same thing ) In essence it is the ability to analyse a price chart in order to predict future price movements. The basic concepts are as shown below :

One of the key things you must understand, is that even though as a technical trader you will principally be studying charts, fundamental data does play a part, but only on a large scale. You use fundamental analysis to determine what part of the business cycle the economy is in and therefore which industries offer the best growth potential. Then you would use that information to identify groups of target stocks, and finally use technical analysis of the price charts to follow trends and select prospects. Let's look at one or two charts. Technical analysis is much more of an art form than a science and you will need to practice constantly and study charts until it becomes second nature!

Technical or Fundamental: Technical Analysis of Charts
Technical online trading, is all about the study and analysis of charts, and throughout the rest of the site you will find various examples of charts highlighting different aspects of this trading style. All of these charts are from the Sharescope package from Ionic, and excellent charting product that I use for end of day data for UK and US shares.

If this is the first chart you have ever looked at- well done CONGRATULATIONS - it will be the first of many. Have a look at the chart by clicking on the image, and after you have looked at the chart, I would like to ask you the following questions. Firstly, given that the chart shows the shares price over the last few months Before I explain the various components of the chart I would like to ask you two simple questions as follows - given that the chart is showing the shares price over the last few months, would you buy or sell this share at the moment, yes or no, and if so why?

Technical or Fundamental: Chart Components
Before I give you the answers, let me just explain briefly the various components of the chart. This is a daily chart for a share called Chloride Group PLC. The left and right hand side show the price of the share in pence. On June 12th 2006 the share price was 90.25 pence.( see right hand side ). Along the bottom is the timescale. In this case the chart goes from 25th Jan.2006 to the 12th June 2006 ( approx. 6 months ). The chart itself has two coloured bars, yellow and red. These are called candlesticks which you will come to know and love! Each bar represents the daily movement of the price of the share, and shows its opening and closing price on the day. The yellow ones are where the price closed up on the day( i.e. higher ), and the red ones where the share price closed down on the day( i.e. lower ). ( the little blue ones are where the price opened and closed at the same point )

At the bottom of the chart is one of the most important pieces of information that you will use in your analysis, and this is volume. The numbers up the left and right hand side ( 2 and 4 ) are the scale in millions, and indicate the number of shares traded on the market during the day. As you can see they are displayed as bars so that they are easy to read. You can instantly see where the volume is high, low or just average. Look at May 1st for example where the volume for the day was approximately 4million, and yet the day before was tiny ( perhaps 200-300,000). You will learn how to interpret this information to help you forecast future prices.