Edition 8: Technical, Fundamental & Mental Analysis: Explained
So you may or may not have heard of Technical or Fundamental analysis before, but have you heard of Mental Analysis?
They are 3 different angles of predicting where the market is going next.
Stick around and I'm gonna explain to you what they are, how traders utilise them in their trading & help you decide what type of trader you are!
1️⃣ Let's begin with Fundamental Analysis (the boring stuff IMO)
Picture a Wall Street trading floor.
TVs stacked in every corner streaming Bloomberg, CNN, Sky News Business.
All are spouting the latest financial reports from major companies.
Mixed with forecasted reserve bank rate hikes, monetary policy, the upcoming FOMC's hot topic of discussion, and the latest supply chain interruptions due to some new global tension.
Are you getting the picture?
I used to work on a trading floor as a stockbroker on Martin Place, Sydney, AU, and still, it's enough to give me a headache just typing it out.
| Fundamental analysis, is the analysis of a business's financial statements, health, competitors and market condition.
It considers the state of the economy and factors including interest rates, earnings reports, employment, GDP, manufacturing, and who's the latest CEO facing sexual harassment investigation for fondling the interns. As you can see, it's a lot to keep up with! And it never ends. No amount of analysis is complete. Many novices think that it’s essential to be keeping tabs on all this if you want to be a professional trader. That's totally not true. I don't follow 95% of what's mentioned above for one reason alone; I simply don't care enough to invest the number of hours it requires to maybe improve my results. It doesn't interest me in the slightest. If that sounds like your cup of tea, then have at it . My girlfriend pesters me enough as it is that I'm not on Instagram liking her posts. I'm almost always the last person to catch these announcements. I’m like, "Omi..what?" by the time people are lining up to get their 3rd jab. |
| 2️⃣ Demystifying Technical Analysis "Now that’s my style of trading!"
Technical analysis is the study of historical price action to predict the direction of the next market move. This study angle includes market oscillations, phase, support & resistance levels, indicators, price action patterns & candlestick formations. These are the six core principles of technical analysis. |
A technical trader carefully observes market behaviour based on recent price action and designs one or more strategies to catch the next market move, waiting patiently until a setup presents.
A solid strategy begins with something like this: "during the past ten years of data, when X+Y+Z happened, price went up 80% of the time."
These core principles have been evident in the market for nearly a century and will continue to be a reliable source of predictions as long as there are markets to trade.
Some sceptics considered TA as merely "reading tea leaves" in the early days.
However, it makes sense when you understand that crowd psychology fuels these core principles and gives them weight.
A solid support/resistance level rejection is predictable because other traders are also trading off the same level!
It becomes a self-fulfilling prophecy.
As a small-time retail trader, in time, you’ll learn to predict what key levels and patterns the big institutions are looking at trading off of, and all you need to do is wait for them to jump in and piggyback off their move!
All markets with a chart react to the same core principles because human psychology drives price action.
Whether forex or equities, crypto or indices, cocoa or bananas, the technical trader can switch between them at the drop of a hat without studying a whole new industry!
I enjoy my life, and raw price action, AKA candlesticks, are my best friends.
Unlike fundamental traders, they leave me in peace when the trading session is over.
Upcoming Chasing Candles editions will detail each of these principles in more depth so you can start incorporating them immediately in your trading!
3️⃣ Mental Analysis - The icing on the cake.
This secret sauce that crypto-bros don’t teach in their online course or publish in the telegram channels. Why?
Because it’s the trading element that the masters keep for themselves and don’t share with the laypeople.
Mental analysis is the craft of guessing what other traders predict will happen next and incorporating that prediction into your next move.
It can be layered in combination with either fundamental or technical analysis, or both.
That probably sounded a bit dense so let me give an example:
NZD has a scheduled rate increase in 6 hours. The current rate increase is still at 1.00%, and the common consensus among traders is that it will be raised to 1.25% in the upcoming announcement.
An increase generally increases the value of a currency.
Being a savvy trader, you’re aware that many traders have already bought into positions early in anticipation of a rate hike, artificially pushing prices up ahead of the official announcement.
When the announcement comes out that the official rate remains the same, you’re positioned to short the market as you watch the buyers sell out or have their positions liquidated, pushing prices down and in your favour.
The actual rate didn’t change, yet the market moved, and you predicted it with your Mental Analysis.
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With over 40 hours of recorded videos, Pro Trader’s comprehensive curriculum walks you through a step by step guide to begin trading! Includes tried & tested, proven & profitable trading strategies! To get you up and running. Pro Trader lightly touches on fundamental analysis, but most of our clients have the same vision in mind as I had for my life. Earn more, work less, and have the freedom to trade any asset class I want so I can do more of what I want, where I want, whenever I want to! Cheers to morning mimosas on the plane to wherever the pilot is taking us! 🥂 |
