There are probably technical analysts who, after fees, taxes and paying themselves for the time they spend on their work, make a tidy profit. However, like punters at a race track, I suspect these individuals are a small percentage of the group.

Fundamental analysis is based on understanding the underlying business, and then valuing its securities based on an estimate of the discounted future cash flows it may generate.

Technical analysis assumes that all of this information is factored into the security’s price, so all one need do is seek out trends in share price movements and volumes to make investment decisions. Even the name of the company is irrelevant.

Promoting technical analysis to retail investors is particularly popular amongst service providers, brokers and the ASX itself because technical analysis often involves more regular trading, which is where the industry makes its money.

Ask any technical analyst how they might purchase a house and invariably they will tell you that location is important, as is the age and quality of the house, the size of the land, price and many other factors. Clearly they take a fundamental approach to real estate investment, yet consider this approach as inappropriate for the share market.

Ask them if they would invest in a corner shop and they will want to see its proximity to population, the price being asked, historical revenues and profits, balance sheet and, perhaps most important, cash flows. Yet ask them if they would buy shares in a retailer on the stock exchange, and all of a sudden these aspects become irrelevant. The wrongly surmise that all of this information is reflected in the share price.

Fundamental analysis of, say, a contract for difference (CFD), would involve actually reading the contract and assessing the implications of any potential risks, such as the counterparty becoming insolvent. One wonders how many clients of the failed Sonray Capital may have shied away had they performed proper due diligence. They must be kicking themselves now that they have likely lost the bulk of their cash holdings and outstanding positions due to the structure they agreed to in the contract.

Many CFD, foreign exchange and derivative service providers have a similar structure of “co-mingling” segregated client accounts, so sorting out ‘who does what’ is a useful exercise for these traders.

What was most striking when speaking with punters at the Trading and Investing Expo was that the technical analysts were there to see what the various service providers had to offer.

So these more savvy traders utilise basic fundamental analysis techniques such as attending an expo, reading contracts and asking questions, in order to assess which platform is most suitable. They would also use fundamentals to assess the merits of buying property and investing in and running a small business.

Yet when finally these traders look at companies listed on a stock exchange, they decide that ‘analysing’ a graph of the share price is all they need to do to make an adequate profit. Often, the false promise of quick riches overcomes simple logic.