Fundamental -vs- Technical Analysis

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ByLoSellHi

Who here has abandoned technical analysis for a purely fundamental analysis approach to stock-picking?

My personal experience is that fundamental analysis trumps technical analysis almost without exception.

I have tried to combine both systems but have found that fundamental analysis grabs hold of the levers in my brain far more powerfully, especially since it has shown me the greatest returns.

For those of you who prefer technical analysis, what is your favorite singular tool (RSI, MACD, etc.)?
 
It is my experience that fundemental analysis can be the key to successful trading for some people. In fact, there are many advantages to fundemental analysis. However, to ignore technical analysis puts you at a great disadvantage. You would have to have an iron stomach. Plan on sitting through weeks of your losses multiplying while you are waiting for the rest of the market to discover the fundemental "truth" you have found. Have you tried usuing just some simple TA to time your entries?

If purely fundemental works for you, then best wishes to ya. I wish I understood the fundemental factors better so that I could trade that way as well.

I think that you will find it a mistake though to not wait for some technical confirmation that your fundemental ideas are going to come to play.
 
If your experience with TA is strictly through indicators like RSI and MACD, its no wonder you had trouble with it. TA is the study of Price, Time and Volume. It can also incompass intermarket analysis, like Gold vs Oil. I use TA and rarely use any type of indicator. I think if you have found success with Fundamental Analysis, stick with that. One type (FA or TA) doesn't have to be wrong for the other to be right.
 
Arnie gave a great answer. I use indicators as well as price action. If fundamentals work best for you, go with it. If you can really make it work, there's a big demand for someone with something to say on fundamentals that's relavent to trading.

Years back I worked for a broker in London and every morning a 3 of us would give a brief talk to the sales guys.

One of the 3 was the company economist and he soon found out that his views were seldom precise enough to locate potential turning points or market movers today.

He could paint with a broad stroke, but missed the fast action.

I'm not knocking fundamentals, just saying they play a different role to TA and can suffer from data lag (eg Enron).

If you have a winner, that's all that matters, and it could be worth a lot if you made it public. Could be a best seller!
 
Looking at past data to determine patterns or trends in order to make decisions about future price action...


What does that describe? Fundamental analysis or Technical Analysis?


If you are smart, you realize it is BOTH!

Studying a price chart or studying a balance sheet is the same premise. Looking at the past to predict the future.

If you think studying sectors and economics is more sound than looking at a price chart you are fooling yourself lol...

Both are just tools. There is nothing magical about them. The tools are not important, it is how the individual trader uses them. So FA v. TA is a useless argument. Picking the tool better suited to your trading style, time frame and ability is mroe important than arguing which is better in a vacuum.
 
Fiundamental analysis is only worthwhile for very long term investing. It has no place in trades intraday or for a few days. TA , which includes RSI and MACD Histogram is for the shorter term trades, but guess what--fundamentals show up in TA, so fundamental analysis can be disregarded totally in long term trades as well. . It's not necessary and gives you one more thing to clog your brain with. Keep it simple--
 
Quote from Arnie:

If your experience with TA is strictly through indicators like RSI and MACD, its no wonder you had trouble with it. TA is the study of Price, Time and Volume. It can also incompass intermarket analysis, like Gold vs Oil. I use TA and rarely use any type of indicator. I think if you have found success with Fundamental Analysis, stick with that. One type (FA or TA) doesn't have to be wrong for the other to be right.
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What a wonderful comment. TA "IS" the study of Price, Time and Volume and should be forever defined that way.

Price is infallible because it "IS" the reflection of market sentiment. Volume is the amount of that sentiment at any given moment. And finally, Time is the increment portal we view that sentiment in. (This is why Volume Bar Charts are the most accurate in viewing any market)

When you apply a man-made indicator to that environment you immediately taint the data if you use that indicator as an execution tool. If you use an indicator as a verifier or confirmation tool for Price you will be better able to learn to use it with consistent success.

If you are successful using FA, cool. For individual stocks or individual commodities I can see the reasoning but the process involves interpretation and I, for one, have never been good with dealing with variables in my trading environment and to me interpretation "IS" a variable by sheer definition. We all know how individual stock or commodity manipulation can occur.

I know individuals that are highly successful using FA but not on the Indices. There the variables are way to overwhelming.

I interact with farmers on a regular basis and they have a hard time understanding why the Markets don't conform to what they "KNOW" about the crops in their fields or the livestock in their pens. To them, FA is the only thing that is relevant. I have to explain to them that speculators add the variable into their environment because they are the unknown factor of the equation. Those individuals make it necessary to use at least some form of TA in their environment to succeed in their hedging.

There is value to both FA & TA but one must understand the environment they trade in to know what applies where with the greatest amount of consistency. That have to open minded as well to all the possiblities.
 
A lot of people (including me) KNEW that AMZN had very little fundamental value in relationship to its price back in 2000. We were right--eventually. I guess it all depends on your time horizon. I think it's a mistake to assume that the market efficiently converts fundamental information to a stock price. IF it happens, there is an unpredicable and unreliable time lag. Take a company that announces a huge increase in earnings, a surprise. If the price goes up, the reason given is the earnings surprise. If it goes down or sideways, people say it was already factored in to the price or some other reason. The truth is you can't always tie the price directly to fundamentals IMO because emotions (greed, fear) can easily overwhelm any rational measurement of value.

Chuck
 
Quote from bluedemon77:

A lot of people (including me) KNEW that AMZN had very little fundamental value in relationship to its price back in 2000. We were right--eventually. I guess it all depends on your time horizon. I think it's a mistake to assume that the market efficiently converts fundamental information to a stock price. IF it happens, there is an unpredicable and unreliable time lag. Take a company that announces a huge increase in earnings, a surprise. If the price goes up, the reason given is the earnings surprise. If it goes down or sideways, people say it was already factored in to the price or some other reason. The truth is you can't always tie the price directly to fundamentals IMO because emotions (greed, fear) can easily overwhelm any rational measurement of value.

Chuck
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Agreed
 
Quote from ByLoSellHi:

My personal experience is that fundamental analysis trumps technical analysis almost without exception.
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It depends on your investment horizon. If you are investing for 6-12 months, then developing a strong grasp of the fundamentals of a stock makes sense. I have met with analysts and money managers from hedge funds ranging from $10m startups to outfits like SAC and Janus and they all use fundamental analysis to some extent (and obviously the big mutual funds like Fidelity are fundamentally driven). If you don't understand a company how can you interpret a piece of breaking news? However, if you're a scalper or a swing trader using a mostly mechanical system, then fundamental analysis is not going to be of that much help, in my opinion.

Suss
 
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