Price Action between Cause and Effect

Commodity markets offer a variety of opportunities for traders, but the choices you make within these markets can significantly impact your risk exposure and trading strategies. Traders can gain exposure to commodities by buying them or putting money into futures contracts whose value is derived from their price changes.

In this fashion, alongside and within the commodity markets, there is a parallel world of financial markets where Technical Analysis concentrates on understanding the market action while Fundamental Analysis concentrates on the economic forces of supply and demand that cause prices to move higher, lower, or stay the same.

The fundamental approach examines all of the relevant factors affecting the price of a market in order to determine the intrinsic value of that market to indicate if a trade is actually worth based on the law of supply and demand. in consequence, if this interensic value is under the current market price, then the market is over priced and should be sold. If market price is below the intrinsic value, then the market is undervalued and should be bought.

Both of these approaches to market forecasting attemt to solve the same problem, that is, to determine the direction prices are likely to move.They just approach the problem from different directions.

Like so, the fundamental focuses at the cause of market movement, while the technical focuses at the effect. The technician, of course, believes that the effect is all that he needs to know and that the causes are unnecessary. The fundamentalist is has to know why.

Most Traders classify themselves as either technicians or fundamentalists. In reality, there is alot of overlap. Usually at the beginning of important market moves, the fundamentals do not explain or support what the market seems to be doing. It is at the critical times in the trend that these two approaches seem to differ the most. Usually they comeback into sync at some point, but often too late for the trader act.

In account for these seeming discrepancies is that market price tends to lead the known fundamentals. Stated another way, market price acts as a leading indicator of the fundamentals or the conventional wisdom of the moment. While the known fundamentals have already been discounted and are already 'In the market', prices are now reacting to the unknown fundamentals. By the time those changes became known, the new trend was well underway.

Into the bargain, Technician learns to be comfortable in a situation where market movement disagrees with the so-called conventional wisdom. A technician begins to enjoy being in the minority. He knows that eventually the causes for market action will become common knowedge. It is just that the technician isn't willing to wait for that added confirmation. Another advantage the technician has is the BIG PICTURE by following all of the markets and avoids the TUNNEL VISSION that can result from following only one group of markets.

Eventually, in accepting the premises of technical analysis, one can see why technicians believe their approach is superior to the fundamentalists and if a trader had to choose only one of the two approaches to use, the choice would logically have to be the technical. Because by definition, the technical approach includes the fundamental. If the fundamentals are reflected in market price, then the study of those fundamentals becomes unnecessary.