2008-12-09: Fundamental vs. Technical Analysis
At times it is necessary to challenge existing thoughts, theories and institutions in order to achieve progress. Many theories and trading methods revered as effective by traders may be revised and scrutinized from time to time. As in all aspects of life we need to evaluate existing behaviour and see if there is room for positive change

It may be difficult to decide whether to follow a fundamental or a technical trading approach, but it is a decision you must make on the basis of existing market realities, your personality and the reality of your available time and money. A possible approach may be a hybrid variant. Many a trader will compare his trading foundation against conclusions extracted by using the second strategy and will only execute trades after examining both analysis types.

The two major approaches, technical and fundamental analysis share a common purpose, to help you make the right trading decisions and to increase your profits.

Technical analysis deals in probabilities, never certainties. Technical analysis is the forecasting of future financial price movements based on an examination of past price movements. This method tells you what is likely to happen to prices over time. The art of technical analysis is to identify a trend reversal at a relatively early stage and ride on that trend until the weight of the evidence shows that the trend has reversed.

Fundamental analysis examines the underlying forces that effect power prices. Fundamentals, then, are the economic realities that ultimately affect price. A solid analysis of fundamentals can provide highly worthwhile information that can be used effectively for trading purposes. The challenge of the fundamental approach for most speculators is that vast amount of time and money can be consumed to obtain the past and present data and to work it into reliable formulations. The complexity of the energy market may be a time consuming task.
There is a variety of available analyses. The trader must be selective in choosing which data to pick and which data to weight more strongly.

It is easy to see how fundamentals affected prices after the fact, but it is difficult to predict how fundamentals will affect prices before the fact. In recent years the globalization of markets has further complicated the task of fundamental analysis. Economic trends, patterns and changes in America and Europe can and do have a significant impact on price trends in Asia and vice versa. The importance of the various fundamentals influencing power prices alter throughout the year.

We live in a world of complex economic actions, reactions, and interactions.
The technical approach to trading can yield excellent results. The same is true of the fundamental approach. There is no "right" answer to which of these two approaches to follow. However, fundamental analysis can be overwhelming in its detail, and a player should decide which approach seems more reasonable and try to develop a consistent method of action. Technical analysis is growing in popularity. The knowledge of the benefits of strategic trading is on the rise. The objectivity of this trading methodology seems appealing in an energy market going through great changes. Specific rules for entering and exiting the market can reduce stress, especially when you trust your strategy.

Both methods do clearly have their own advantages and limitations. Many players make use of them together as complementary to one another. No matter what approach you use in trading, the end result will be determined by your skills as a practitioner with the method or methods you have selected.

The methods of market analysis and trade selection do not grant the “magic” that automatically leads to profits. In addition to an effective methodology, self-discipline, and solid risk management you need follow-through and consistency. It takes time and endeavour to gain the knowledge and procedures that makes success possible – the good thing is that it can be done!