The nature of chart analysis-led trading

Chart analysis includes approaches like Wyckoff VSA which looks for the footprint of the professional traders – the market makers, the hedge funds, the banks, the proprietary firms – in the way volume, price and spread interact. This enables the user to avoid being wrongfooted by them and  make money by following in their footsteps. Chart analysis also includes technical analysis methods where mathematical formulae are used to predict future performance from previous performance.  This gives guidance as to when to enter or exit a trade.

Either school is focused on the idea that everything you need to know about the asset is incorporated in the chart. Given that these methods take time to learn, why even consider fundamental analysis?

What is fundamental analysis?

For the purposes of this article, we are using the term fundamental analysis to mean not just analysis of balance sheets but staying aware of big-picture political and social developments, as well as the macro-economic factors associated with your target company or commodity and looking at dynamics hitting the sector, country or region as a whole.

If you delve deeply into classic fundamental analysis you’re getting to grips with qualitative metrics as well as quantitive indications of performance. That takes time to learn. People who really delve into all the aspects of analysing an instrument, its competitors, the relevant sector and any geo-political impacts are most likely long-term investors.

Most people do a bit of both, even if they say they don’t But even short-term traders, unless they live in a news-free vacuum, are probably, incorporating some of this into their thinking. For a start, it might be what leads you to zero in on a particular asset class in the first place. Fundamental analysis helps identify opportunities while chart analysis helps to identify the right timing for entering and exiting a trade.

It can alert you to market manipulation

And if, for example, we didn’t know that the nature of the business that GameStop was in meant the company was fundamentally in trouble, the significance of the January 2021 push by retail traders to drive its share price higher would be lost.

Or consider the market correction when the pandemic first hit in March 2020: it dented the share price of many companies whose long-term outlook was strong, despite any short-term changes in consumption and behaviour by consumers in lockdown.

And as Gavin Holmes, Tradeguider CEO, points out, if you see market influencers or famous people sharing their views about, for example, cryptocurrencies on a Friday then there’s a chance they are letting the public digest the news over the weekend and then they test the market on the Monday to see if people are biting, before making a big move.

So while you might not trade the news, using it to highlight market manipulation can help determine the direction of your trade. If the news is good but the fundamentals of a company are weak for any reason, then you can use Wyckoff VSA to determine whether the price is going to go down and the professional money is behind some `fake news` despite there being rumours out there saying the stock is strong. Then you know you`ve got an opportunity to short that instrument. Meanwhile the opposite is true: If the background on an instrument is strong then the general investing direction is long. 

Summary:  Stay sceptical

Once again, it’s important to remember that news needs to be taken with a pinch of salt. And there needs to be an element of scepticism when it comes to a company’s financial accounts too. While it might not be the norm, history shows that company accountants have been known to falsify the books: look at the story of Enron for instance.

`Don’t try to get too involved in what’s going on behind the scenes because you’ll never know [for sure]`, says Gavin.

So while you know the wider news backdrop, it’s always important to keep that questioning mind engaged.

And as he adds, `The only thing you can trust in the financial market is the chart.` 

Sources

When to Use Fundamental, Technical, and Quantitative Analysis - Investopedia

How and Why You Should Combine Fundamental & Technical Analysis in Forex Trading - Trade2win.com

Fundamental Analysis vs Technical Analysis - Trading 212