Let’s start with the technicians. Their key tool is the financial chart, which they study, paste technical indicators on to and try to discern key levels and repeating patterns. Their belief is that all the external NOISE, they call it, is included in the chart’s behavior, and that fundamental analysis is therefore a waste of time. Now, before we trash that idea, let’s think a minute. 

The chart reflects the behavior of traders: if they think something’s cheap but will go up, they’ll buy. If they think it’s expensive and will go down, they sell… before it’s too late. If we accept that human behavior is more or less constant, that people will react in the future to similar stimuli as they did in the past, then patterns begin to emerge. And if enough traders are busy studying the charts instead of reading the news, then those patterns become self-perpetuating… a kind of ideal closed system.

Fundamentalists, on the other hand, study an asset’s inherent value. In shares, they study a company’s surrounding sector, its management, its financial reports and so on. In forex it’s politics and economic announcements. In commodities, it’s all the above plus the weather. In short, there’s no boredom here. Then, based on that, they will assess what an asset’s fair price should be and if it’s overpriced – sell it – or undervalued – buy it. Their main tool is the economic calendar, corporate quarterly reports, the news and so on. Obviously this approach makes more sense, at first thought. But remember – finance is numbers, and it’s not always easy to translate text into numbers. Even with economic indicators, which PROVIDE numbers, it’s difficult to quantify how the crowd will feel. So maybe the graphic approach makes more sense?

Well, perhaps one day bridging that, we now also have sentiment analysis. It’s a VERY new approach, but one that’s increasingly being used in many interesting ways. Often referred to as opinion mining or behavioral finance, here we have a kind of amalgamation of both styles, with a twist. Basically, computers will scan the airwaves – that’s news, announcements and even twitter – and look for key terms. This is certainly a relatively new field that depends on big data processing and developing algorithms. But it’s established enough for there to already be courses for sale on the internet

The question at the end of the day is, are you more comfortable with numbers or words? Can you bring yourself to trust a 2-dimensional graph more than the words of a central banker? Clearly, the BEST approach is to select the style that best suits you and use the other as confirmation. If the tools are out there, why ignore 50% of them?