Fundamental and Technical Analysis
Traders forecast futures prices using two broad approaches. Fundamental analysis studies the real economic forces of supply and demand, while technical analysis studies past price and volume behavior. This chapter contrasts the two.
Fundamental Analysis
Fundamental analysis estimates the intrinsic value of a commodity by examining the factors that drive supply and demand: crop production and weather, inventory and stocks reports, interest rates, industrial usage, government reports, and macroeconomic data. A fundamental analyst asks whether current prices are too high or too low relative to underlying conditions and forecasts where prices should move as those conditions change.
Technical Analysis
Technical analysis ignores underlying economics and instead studies charts of past prices, volume, and open interest to identify trends and patterns. Technicians use support and resistance levels, trendlines, moving averages, and chart formations, assuming that history and crowd psychology tend to repeat. The technician's goal is timing entries and exits, not judging whether a commodity is fundamentally cheap or expensive.