# Fundamental vs. Technical vs. Economics



## Rypieee (24 September 2015)

Hello readers,

Before I even begin my thread, I would just like to also mention that I have no experience in trading and that I only educate myself on the various theories behind analysis by traders and the happenings of our economies and those that surround/affect us. I am just a customer service representative who is in the midst his economics and finance degree.

I would also like to mention that this thread is in no way meant to start an argument between the different techniques and more so for my own personal understanding.

I would like to receive some constructive feedback on my thread, not sales pitches about what methods/tools are the best but a nice discussion as to why some may work and not work.


I would begin my discussion with Fundamental Analysis. There is so much to fundamental analysis as the great Warren Buffet himself have become the figurehead of the theory. MY basic understanding of fundamental analysis is that it looks into a company to determine whether the business as a whole is well/healthy. Ratios that are aligned with the company such as P/E and D/E have played a part in the analysis of a company.

A very general bottomline would be that fundamental analysis focuses on the fundamentals, they do not care so much for the price movement/actions of the day, rather, they look into the business models, see if a company is being well managed and possibly their future prospects. 


Then we get to technical analysis, which focuses on, once again in a very general term, the demand and supply of the company's share. TA do not concern themselves with the health of the company as they believe that the price has captured the fundamental analysis process. TA focuses on the "momentum" of the share price which swings between the buyers and sellers. Of course there are other theory such as elliot waves and fibs which I do not understand at all so I do apologise if I am just brushing it off because I do not understand it. I do have a very simple understanding of TA such as resistance and supports, volume analysis and looking out for distribution and accumulation periods.

Now it comes to comparing the two analysis!

I can't seem to understand how TA is able to predict future prices/movements due to just reading the numbers and plotting the graphs. In the same way, FA could be showing a strong indicator that a company is well and healthy but if the market is not demanding the company, the share price would fall regardless.

The only thing I can think of that will predict future prices will be looking at events on an economical level and seeing the trickle effect it will have on certain sectors/industries and making a decision to enter the right sector/industry. 

I would just like to point out a few examples that I have thought about in my head and that is, 

If BHP loses the demand for it's goods, even though it is a top tier company with the lowest cost of production in the basic minerals sector, it still becomes less profitable which will be shown in a downward trend of the price. TA comes into play and draws it's support and resistance lines and look for potential breakthroughs but overtime, the BHP company itself would go down hill.

If we woke up and received news that one of the emerging markets like India/South Africa have decided to go full speed in developing it's economy and infrastructure, that increase in demand will then be passed on to BHP, who will absorb these demands and utilising it's low cost production process, be ahead in the game. In this instance, we will see the price of BHP shoot back up.

This is the only way that I can imagine we can pick out stocks and give concrete credibility as to why the stocks will go up or down.

Now I know I have just gone full circle and lost my train of thoughts, but I hope you can see why I am in such a dilemma to understand the whole concept. There could be so much more that I am missing and I would gladly listen to what others have to say about the subject.

My current understanding/theory is that I look at economical events to identify possible improvements/deterioration in sectors or industries, separate the stronger companies from the weaker ones through fundamental analysis and then using TA to pinpoint the right entry/exit times. 

P.S I really dont see how TA's are able to predict the future with numbers and graphs, however, I completely agree with TA's that there is an element of market psychology involved in trading and that TA will be able to identify the market's mood towards a stock.


I know my post is long and not exactly smooth to read, I would really appreciate if someone to expand my understanding, especially about TA!

At the end of the day, the market itself is controlled by the big boys on the top level and the only way for us, I believe, is to be able to read what they are doing through the graphs and follow suite, for they will always be 10 steps ahead of us.

Thanks for your time,
Rypieee


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## luutzu (25 September 2015)

*Re: Fundamental vs Technical vs Economics*



Rypieee said:


> Hello readers,
> 
> Before I even begin my thread, I would just like to also mention that I have no experience in trading and that I only educate myself on the various theories behind analysis by traders and the happenings of our economies and those that surround/affect us. I am just a customer service representative who is in the midst his economics and finance degree.
> 
> ...




At the end of the day, both TA and Fundamentalists all use a ruler and draw straight lines. Joining the last few dots and extending it next few dots.

The fundamentalists are somewhat more sophisticated in that they bs better and quote some speeches or forecasts and supply and demand stuff... the TA guys are more honest and to the point.


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## Triathlete (25 September 2015)

*Re: Fundamental vs Technical vs Economics*



Rypieee said:


> My current understanding/theory is that I look at economical events to identify possible improvements/deterioration in sectors or industries, separate the stronger companies from the weaker ones through fundamental analysis and then using TA to pinpoint the right entry/exit times.
> 
> Thanks for your time,
> Rypieee




That sounds about right to me....

Here is a quote from a professional trader that I once heard say....whether right or wrong it makes sense to me..

Your job as a trader is to predict the future, thus predicting what will be in the newspaper 6-12 months time.

Professional traders buy or sell assets now, so that in 6-12 months time when the news becomes mainstream and the story is over, they can use the liquidity of the traders that are "late to the trade" ( retail traders) to get out.


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## sinner (25 September 2015)

Here's my 

https://en.wikipedia.org/wiki/Benjamin_Graham


> Graham wrote that the owner of equity stocks should regard them first and foremost as conferring part ownership of a business. With that perspective in mind, the stock owner should not be too concerned with erratic fluctuations in stock prices, since in the short term the stock market behaves like a voting machine, but in the long term it acts like a weighing machine (i.e. its true value will be reflected in its stock price in the long run)




http://fortune.com/2014/02/24/buffe...ou-can-learn-from-my-real-estate-investments/


> t should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings ”” and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his ”” and those prices varied widely over short periods of time depending on his mental state ”” how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.
> 
> Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits ”” and, worse yet, important to consider acting upon their comments.
> 
> Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of “Don’t just sit there ”” do something.” For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.




The above one really resonates with me. I like to think of the owner of a milk bar or corner store during the GFC. Probably they woke up every morning and did the same thing they did yesterday (sit behind the register and sell $50-100 worth of groceries to the locals). That the GFC may have impacted the valuation of their business is a fact which probably never ever occurred to them, they just keep coming in and selling groceries from behind the counter.

Saving the best for last:
http://www.hussmanfunds.com/wmc/wmc150525.htm


> The greatest miscalculation in my career as an investor has been to underestimate the lengths to which the miscalculation of speculators can extend. I’ve had to correct that error twice, and even if the completion of the market cycle ultimately made the error irrelevant, the challenge was excruciating in the midst of the market cycle, at least until it was fully addressed. The fact is that valuations drive long-term returns, but over shorter horizons, stock prices are the result of whatever investors collectively believe, however reckless or detached from historical evidence those beliefs may be. As long as enough market participants are attached to the idea that risk is their friend (or enemy) regardless of the price, there is no natural limit to how overvalued (or undervalued) stocks can become. There is only one way to address this: measure investor risk preferences directly through observable market internals. Don’t expect an overvalued market to crash until internals deteriorate; don’t embrace an undervalued market too aggressively until internals improve.
> 
> It’s a lesson that value-investors have learned and re-learned throughout history. Even the legendary value investor Benjamin Graham discovered it, in his case by becoming constructive far too early during the market collapse of the Great Depression. The collective risk preferences of investors rule the short run, but valuations ultimately rule the long run. Graham famously summarized that lesson in one sentence: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
> 
> ...


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## Gringotts Bank (25 September 2015)

Rypieee said:


> P.S I really dont see how TA's are able to predict the future with numbers and graphs, however, I completely agree with TA's that there is an element of market psychology involved in trading and that TA will be able to identify the market's mood towards a stock.




You answered it there yourself.  Take an example of a very successful pattern, such as a high tight flag.  It reflects psychology in the following way.  The big run up the flag pole says 'buyers all over this, something's up'.  The usual response to a big run up would be a sell off as traders take profits, but this doesn't happen.  Instead it pauses and forms into a small flag.  It means traders are *so* confident they will hold for further gains.  

Have a look at LNG chart over the last few years.  Daily and intraday if you have it.


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## Knobby22 (25 September 2015)

Ultimately, Fundamental investing is the purest and most likely to make massive money however....and it is a big however, you have to know what you are doing and be prepared to spend days studying the annual reports, the industry the company is involved with and the managers involved. Very few people can do this.

Technical investing picks up trends from fundamental investors. Sort of piggy backing.
It also has good rules to protect from market corrections which pure Fundamental investors lack.
It is a lot easier and still very profitable.

Personally I use both, but often not together, as they can conflict.


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## Tom32 (25 September 2015)

While many don't believe using economics principles that were founded over 100years ago is any more predictive than reading entrails I think this is where I find myself most comfortable. This will mean buying etf's mostly rather than individual stocks. For example picking etf's that represent markets that have had underinvestment in capital and approaching supply constraints (for which they are a producer and have the mine / factory / skillset to produce said commodity. 

It's how I used to invest, though only went on individual stocks which could at times dissapoint even falling / failing when market conditions were improving (cough pasminco cough) dissapointing when you discover they had hedged against the very thing you wanted exposure too and got smashed by the very thing you hoped would happen. 

I guess it illustrates the point to me that if you are going to go fundamental analysis on an individual stock you have to really scratch below the surface further not just looking at costs per tonne and output projections v expected future prices say for a miner. Something I don't expect I will have the time to keep abreast of for one company let alone a dozen or so.

Putting my hard earned into a market I am optimistic about will at least give me an average exposure to the very thing I want exposure too.


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## Rypieee (25 September 2015)

Hey guys, thanks for the replies that I have received on this post!!

I want to start off by comparing between FA and TA. Many people feel that TA are short term investments and that FA will ultimately "rule" in the long run, is this the case??

Also I liked that I have received both feedback on TA and FA and everyone has pointed out the pros and cons to each analysis/methods.

I have a few more questions on the topic!!

If I am to receive say 100k for investment purposes, my ideal methodology in my head at the moment would be to have 25k for value investments (finding under valued companies and checking out their credentials and stability/future prospects), 45k for growth investments (on companies that do a lot of reinvestments in themselves to expand into other economies and predominantly receive their income from overseas economies such as emerging/developing markets or even new industries) and the remaining 30k for swing trading (hoping to ride the upward movements of sideway graphs).

Is that a sound investment plan?

I have yet to learn about swing trading other than what type of trading it is, I need to learn how to read volume and anticipate the potential changes in trendlines to be able to do so so if anyone have good articles/books on swing trading, please post them below too!

Also, wanted to see if anyone on here uses StockDoctor, I have seen some thread about SD but would like any personal insights to this thread too!

Thank you again for taking time out to educate me!!

P.S. Looking for a mentor in melbourne who would like to adopt a new keen disciple!


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## Triathlete (25 September 2015)

Rypieee said:


> Also, wanted to see if anyone on here uses StockDoctor, I have seen some thread about SD but would like any personal insights to this thread too!




Yes I use Stock doctor for my Fundamental analysis but I* never *take a position until I run my Technical analysis over any company that looks interesting.

Happy with the Stock doctor product.


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## luutzu (25 September 2015)

Rypieee said:


> Hey guys, thanks for the replies that I have received on this post!!
> 
> I want to start off by comparing between FA and TA. Many people feel that TA are short term investments and that FA will ultimately "rule" in the long run, is this the case??
> 
> ...




If it's other people's money, then you spread it all over the place and charge them a fee for your genius.

If it's your money, invest only in what you know. Spreading it into things you don't know and chances are you will lose it by entering too late or leaving too early, you won't know which you'll just know your cash weren't as much as it used to be.

If you want to speculate or trade... yea put aside a small percentage and speculate on businesses you think might have a bright future that will many times your cash.

I think it's better to pick an approach that make sense to you. That way you can learn from success as well as failures. To go either way, FA or TA, and if the market or the stock just happen to do well and you designate it as the TA or the FA when really it's just luck or rise or fall for other reasons.. and if you don't know why, the grins from your new riches might mislead you about your genius and the pain of losing might also mislead you about the other approach.

You stock rise or fall for many reasons... one among them is you picked it right; then you pick it right and you're also lucky the market come round and inflate it further... Or it could go south simply because you're dead wrong, or south because market sentiment and over-reaction is causing temporary (1 or 2 years, say) mispricing.


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## Rypieee (25 September 2015)

I have read through your blogs but what methods do you adopt for your TA? For me personally, I am overwhelmed by the numerous techniques and methods to use that I just have a handful of theories up my sleeves that seem to overlay each other and I can't make my mind up!!



Triathlete said:


> Yes I use Stock doctor for my Fundamental analysis but I* never *take a position until I run my Technical analysis over any company that looks interesting.
> 
> Happy with the Stock doctor product.


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## Rypieee (25 September 2015)

luutzu said:


> If it's other people's money, then you spread it all over the place and charge them a fee for your genius.
> 
> If it's your money, invest only in what you know. Spreading it into things you don't know and chances are you will lose it by entering too late or leaving too early, you won't know which you'll just know your cash weren't as much as it used to be.
> 
> ...




I will be most definitely very careful with my investment allocation, and if i do hit a jackpot or stumble over a pothole, I will want to know why and how I did it, was my analysis correct and was that the true or biggest reason to why the stock rose or plummeted. If there seem to be no apparent reason or relationship of the movement of the stock to my analysis and theories that I applied to the stock, then I will count that as a lucky/unlucky break and will not think that I am a genius and belong with the category of the professionals

I am someone who gives myself constructive feedback and I don't hang out in the dreamworld often, the market is deep waters and if I'm not careful, I will be gone before I know it

Thanks for the reply!


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## sinner (25 September 2015)

Rypieee said:


> I have read through your blogs but what methods do you adopt for your TA? For me personally, I am overwhelmed by the numerous techniques and methods to use that I just have a handful of theories up my sleeves that seem to overlay each other and I can't make my mind up!!




There are not really that many strategies, most fall into one of a small handful of baskets (not including intraday strategies).

* Tactical Asset Allocation, basically pick a universe of N asset clases (e.g. Local Equities, Emerging Equities, Developed Equities, Government Bonds, Real Estate, Corporate Bonds, Commodities) and each month rotate in/out of some of these based on technical criteria (e.g. absolute or relative momentum)

* Trend following/Momentum, basically pick a universe of N equities (e.g. ASX 200 stocks) and rotate in/out of some of these based on technical criteria. There's a system created by one of the ASF members tech/a, the system is known as "techtrader", it provides a pretty complete example of this category.

* Short term price action, which will either be betting on very short term movements to continue or reverse depending on the asset class or instrument (for example EURUSD is generally prone to continuation while oil is prone to reversal).

* Trading volatility, some strategies above are actually poor synthetic replicas of long or short vol strategies (e.g. momentum can often be replicated by selling vols and other trend following strategies will have returns very similar strategies to buying vols). I also count most risk parity strategies under this basket.

* Adaptive trading, which usually involves machine learning or other computer science fundamentals using the above strategies technicals as inputs.

So you might find a million different technical strategies on the net but at the end of the day they all roughly fall into one of those categories and you can see it in the equity curves.

In general the easiest thing to do is buy equities or sell volatility, so I'd recommend techtrader as a good place to start, like I said it is a very complete example.


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## Triathlete (25 September 2015)

Rypieee said:


> I have read through your blogs but what methods do you adopt for your TA? For me personally, I am overwhelmed by the numerous techniques and methods to use that I just have a handful of theories up my sleeves that seem to overlay each other and I can't make my mind up!!




I usually start with some price analysis first as this determines which price levels are the strongest for a particular stock.

Then I work out what Elliott wave the stock is on at the time eg. is it an impulse wave or a corrective wave.

Then I may also use some time analysis to work out the likely turning points into the future and where a stock is likely to find support or resistance at a particular price level.

I will take a position based on this analysis having both an upside and downside target prior to any trade I take.


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## Rypieee (25 September 2015)

sinner said:


> There are not really that many strategies, most fall into one of a small handful of baskets (not including intraday strategies).
> 
> * Tactical Asset Allocation, basically pick a universe of N asset clases (e.g. Local Equities, Emerging Equities, Developed Equities, Government Bonds, Real Estate, Corporate Bonds, Commodities) and each month rotate in/out of some of these based on technical criteria (e.g. absolute or relative momentum)
> 
> ...




Thanks Sinner,

With the points you have mentioned, I feel like the first two points will most definitely resonate with my trading methodology for now, as i begin my journey, i will better understand the type of trader i want to be. For now, tactical asset allocation and momentum/trend following (something I want to pick up and have basic understanding of) is what I am looking deeply into

I will check out tech/a's techradar for sure!


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## Boggo (25 September 2015)

Triathlete said:


> Yes I use Stock doctor for my Fundamental analysis but I* never *take a position until I run my Technical analysis over any company that looks interesting.
> 
> Happy with the Stock doctor product.




Works for me too [emoji106]


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## Rypieee (25 September 2015)

Rypieee said:


> Thanks Sinner,
> 
> With the points you have mentioned, I feel like the first two points will most definitely resonate with my trading methodology for now, as i begin my journey, i will better understand the type of trader i want to be. For now, tactical asset allocation and momentum/trend following (something I want to pick up and have basic understanding of) is what I am looking deeply into
> 
> I will check out tech/a's techradar for sure!




Had a look around but can't seem to find anything on techradar other than some QnA thread


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## sinner (25 September 2015)

Triathlete said:


> I usually start with some price analysis first as this determines which price levels are the strongest for a particular stock.
> 
> Then I work out what Elliott wave the stock is on at the time eg. is it an impulse wave or a corrective wave.
> 
> ...




Oh yeah, this post reminds me there is another category of technical trading, which is basically unquantifiable. Some people swear by it (see above) but since it can't be reproduced there isn't really any way to verify or research the technique.



> With the points you have mentioned, I feel like the first two points will most definitely resonate with my trading methodology for now, as i begin my journey, i will better understand the type of trader i want to be. For now, tactical asset allocation and momentum/trend following (something I want to pick up and have basic understanding of) is what I am looking deeply into




A few random links to help you on your way. 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461
http://seekingalpha.com/article/3070036-understanding-dual-relative-and-absolute-momentum
http://blog.alphaarchitect.com/2015...tock-momentum-strategies-friends-not-enemies/
http://blog.alphaarchitect.com/2015...robust-asset-allocation-raa-vs-dual-momentum/
https://engineeringreturns.wordpress.com/2010/07/26/rotational-trading-system/



> I will check out tech/a's techradar for sure!




tech*trader* 
https://www.aussiestockforums.com/forums/showthread.php?t=1560&page=2


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## Triathlete (26 September 2015)

sinner said:


> Oh yeah, this post reminds me there is another category of technical trading, *which is basically unquantifiable*. Some people swear by it (see above) but since it can't be reproduced there *isn't really any way to verify or research the technique.*




That is correct ...It basically comes down to the skill of the technician and his/her trading results.

That is the way I like it my skill against the market so far I am winning.

Thankfully the 3 stocks WOW,CBA,BHP that I put up on this forum many months ago with my analysis using this technique all went the correct way. Let us see what happens with TLS

Cheers
Triathlete


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## tech/a (26 September 2015)

I look at it simply.

*Economics (macro)*

The Ocean where all boats (Stock) rise
All boats (Stock) fall and often just sit there.

*Fundamental Analysis* 

The art of determining where the crowd should or shouldn't be.

*Micro Economics*

Fundamental Analysts tools of trade.---along with Macro economics.

*Technical analysis*

The art of reading the crowd by looking at it.
Generally if there is a fire most will run
If there is money inside most will come and quickly
If its isn't clear that there could be money coming or a fire the crowd will be indecisive.

*Intraday trading* 

The art of reading and moving with the crowd as its happening.

*Systems trading*

The art of determining similar conditions as times past then combining inputs and variables to a universe which are designed and do deliver a positive expectancy.

If all fails 
see* Macro Economics*


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## Value Hunter (26 May 2016)

Technical analysis = squiggly line voodoo. Yeah I really just said what most of us fundamental guys actually think.

I have yet to hear of a single person that has made a few hundred million from technical analysis alone. As for fundamental analysis there are plenty of billionaires who fit that category.

Tell me what does a technical analyst do when buying an unlisted asset with no price history such as a small business for sale? They have to look at the fundamentals don't they?


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