There are two basic types of futures analysis: fundamental and technical. Fundamental analysis is the more traditional of the two because it deals with many facets of conventional financial theory. Conversely, technical analysis is the study of price action itself, within both a historical and evolving context. So, which is superior: fundamental or technical analysis?
As in most things trade-related, the answer to this question is a matter of opinion. However, there’s one firm rule in the futures markets ― if something consistently makes money, then it’s the correct answer.
Typically, strong market analysis leads to profit. Let’s take a look at five ways to improve your analytical game, regardless of whether you’re a fundamental or technical trader.
Improve Your Fundamentals
At its core, fundamental futures analysis is the study of a market’s underpinnings. Traders who take a fundamentals-based approach frequently focus on such factors as macroeconomic cycles, breaking news items, and supply-demand curves. Accordingly, here are two ways to immediately boost your fundamental chops.
#1 Watch the News
It may sound like an elementary point, but being in tune with the current news cycle is a key part of any fundamentals-based analytical approach. Staying abreast of the pressing geopolitical, economic, and social issues of the day is a good way to be on the cutting edge of developing trends in asset pricing.
In practice, the best way to stay in the loop is to subscribe to a live news feed. Two examples of institutional-grade services are Bloomberg Terminal and Thomas Reuters. Free and discounted options are also available, mitigating or eliminating costs.
#2 Reference an Economic Calendar
Perhaps the most important tool in any fundamental trader’s toolbox is the economic calendar. The release of official reports, metrics, and speeches from financial authorities can spike participation and pricing volatility. Being aware of when these events occur is a big part of avoiding undue risks.
Fortunately for active traders, key events in the financial world are scheduled well in advance of being released to the public. For those practicing fundamental futures analysis, having access to an economic calendar is a must.
Build a Strong Technical Game
In contrast to fundamentals, technical futures analysis requires robust charting software, a collection of indicators, and exchange-based streaming data. Access to pricing charts, indicators, and data are non-negotiable ― without these inputs, examining technicals becomes exponentially more difficult.
However, assuming these prerequisites are met, there are a few specific ways to strengthen your technical game.
#3 Eliminate Noise
Many technical analysts fall prey to one simple pitfall: They make things too difficult. Sitting in front of a dozen screens and 50 pricing charts doesn’t do anyone much good. When it comes to information, there’s a point of diminishing returns ― eliminating extraneous data streamlines the decision-making process and helps you avoid analysis paralysis.
The best way to reduce market noise is to simplify your approach. Focus attention on a few markets, pricing charts, and indicators. By cutting down the data flow, you’ll be free to focus on what’s important ― making money.
#4 Use Multiple Indicators
It may sound contradictory to item #3, but it’s important to incorporate multiple indicators and time frames into any technical approach. Relying on a single tool makes the analyst one-dimensional; adding another indicator (or two) as a confirmation device can aid in the filtering of bad trades.
Traders have nearly infinite ways of incorporating multiple technical indicators to boost their performance. The key to success is to choose tools that complement your trading strategy and avoid using too many.
#5 Stay Objective in Your Futures Analysis!
It’s imperative that you perform any futures analysis in a purely objective fashion. Hazards such as hindsight bias and data backfitting can undermine any study. All analysis must be as scientifically neutral as possible to be effective. If not, the results are highly questionable, and crafting consistently strong trading decisions will become an epic challenge.
For more information on technical and fundamental analysis, check out the digital futures guides available at Daniels Trading. Featuring titles such as Basic Training for Futures Traders and 10 Rules for Technical Futures Trading, they cover a wide variety of topics and can be an invaluable asset for your venture into the marketplace.