Charts vs. Fundamentals

nioka · 29 May 2008

So many traders talk charts all the time.A certain formation on the chart is supposed to mean so much to so many. Now if everyone believed 100% in charts they would be a self fullfilling prophecy. If a chart says BUY and everyone buys then the price would rise with the buying pressure. If a chart says SELL then everyone would sell and the price would fall. The chartists would say "see, the charts were right".

This result would be there regardless of the result a company would be having in it's business.

Are the chartists and system traders distorting the market? I believe they are.

When a stock "breaks out" has it anything to do with the chart or is it;

(a) Because chartist traders started buying because the chart said it would.or
(b) Because the company made a favourable announcement.

Now if the announcement caused the breakout and the chart only reflects the event, wouldn't it be better to buy on the event than later on because the chart said it was breaking out. Even better isn't it better still to pre guess the announcement, assuming an educated guess has a better than 70% chance of success.

The point I am suggesting is that trading using fundamentals leaves trading the charts for dead. I do admit that to trade the fundamentals you do need to use the charts but forget triangles, cups etc.

professor_frink · 29 May 2008

Re: Charts vs Fundamentals

oh god here we go again. This discussion seems to pop up quite regularly, and we've had more than one thread devoted to it before.

Does it really need to be discussed again

tech/a · 29 May 2008

Re: Charts vs Fundamentals

Yep bloody hopeless.

Just a few notes exchanged between a few chartists who keep in contact here.
Note the date of the analysis.

pattyp · 29 May 2008

Re: Charts vs Fundamentals

Hi,

Respect and Use both... Charts are "group psychology" transformed into visuals... Its not magical/mystical BS...

And what are we buying...? Business'... Understanding and forecasting business' is invaluable when what you are doing is purchasing a business.

Just my opinion...

Pat

wayneL · 29 May 2008

Re: Charts vs Fundamentals

nioka said:
So many traders talk charts all the time.A certain formation on the chart is supposed to mean so much to so many. Now if everyone believed 100% in charts they would be a self fullfilling prophecy. If a chart says BUY and everyone buys then the price would rise with the buying pressure. If a chart says SELL then everyone would sell and the price would fall. The chartists would say "see, the charts were right".

This result would be there regardless of the result a company would be having in it's business.

Are the chartists and system traders distorting the market? I believe they are.

When a stock "breaks out" has it anything to do with the chart or is it;

(a) Because chartist traders started buying because the chart said it would.or
(b) Because the company made a favourable announcement.

Now if the announcement caused the breakout and the chart only reflects the event, wouldn't it be better to buy on the event than later on because the chart said it was breaking out. Even better isn't it better still to pre guess the announcement, assuming an educated guess has a better than 70% chance of success.

The point I am suggesting is that trading using fundamentals leaves trading the charts for dead. I do admit that to trade the fundamentals you do need to use the charts but forget triangles, cups etc.

Why are some people so cognitively biased?

As the professor says, already done to death, but just shows a lack of understanding of the purpose of TA.

BTW triangles etc have made a lot of people a lot of money, just as ratio analysis has.

Both work if the analyst know what they are about! Get it?

explod · 29 May 2008

Re: Charts vs Fundamentals

wayneL said:
Why are some people so cognitively biased?

As the professor says, already done to death, but just shows a lack of understanding of the purpose of TA.

BTW triangles etc have made a lot of people a lot of money, just as ratio analysis has.

Both work if the analyst know what they are about! Get it?

Could not agree more. You have to trade off everything you can understand, get your hands on and and see from both t.a and fund. Having said that the many newcomers need to be assisted as we were.

Wysiwyg · 29 May 2008

Re: Charts vs Fundamentals

nioka said:
The point I am suggesting is that trading using fundamentals leaves trading the charts for dead. I do admit that to trade the fundamentals you do need to use the charts but forget triangles, cups etc.

Your posts are always welcome no matter what the `seen it all before` crew say nioka.

I think the technicals are possibilities only.This is my observation of one possible chart pattern ...

A flagpole is formed by positive news.One or two days of buyers climbing over the top of each other to get in.(on the positive news)
Then there is a point where the buyers and sellers are balanced out.

A period of time follows where those who bought in on the announcement decide whether to sell or hold, and any late comers decide whether to buy in or wait for the price to come back down.

This period of time is when a pattern is formed by the thoughts of all those with interest in the stock.Typically it dips a little and people buy in or rises a little where people sell out.What happens after the announcement is the fears, emotions and common sense of those involved forming the pattern.

So observation of the psyche of those in that trade (via the pattern)will reveal a possible outcome, although there is never a 100% guarantee.

The example below shows this in detail.Very simple but shows the basics of an event.
#something will happen to change the pattern soon.

nioka · 29 May 2008

Re: Charts vs Fundamentals

professor_frink said:
Does it really need to be discussed again

Yes. If only to get a balance. The "chartists" seem to take credit for predicting trends that are formed by fundamentals in most cases and because of that the fundamentals, if examined closely, will get you informed BEFORE the chart reflects the event. I would sooner know what is going to cause a chart to change than see a change and have to go and look for a reason.

nioka · 29 May 2008

Re: Charts vs Fundamentals

Wysiwyg,

The chart for AZZ that you show is a good example of getting in first with the news. An oil well in progress as it nears the pay zone a director buys shares, the first fundamental reason to buy. Then the SP rises good time to hold. Next comes the announcement you expect because of the director buying (maybe insider trading but it does go on), the share price goes crazy. You then sell, at least enough to free carry a holding, because from experience you know there will be profit taking so you get in first.

All the charts did was record the event.

That's how I trade folks and it works for me.

wayneL · 29 May 2008

Re: Charts vs Fundamentals

nioka said:
Yes. If only to get a balance. The "chartists" seem to take credit for predicting trends that are formed by fundamentals in most cases...

Nioka

1/ Only the esoteric schools (Gann etc) claim to be able to predict trends. Most TA does not attempt to predict trends at all, they are attempting "catch" trends in a timely fashion. Big difference.

...and because of that the fundamentals, if examined closely, will get you informed BEFORE the chart reflects the event.

I don't think any experienced TA would disagree with you here. But FA is not an exact science either. Even the best FA can get you into some real dogs. Even the best FA picks may entail some waiting for them to pay off. Look at any of the famous FA's portfolios that are published, you will see some tremendous winners, but also some abject disasters as well. The trick is getting the sum of wins bigger than the sum of losses, in that sense, both TA and FA are no different.

I would sooner know what is going to cause a chart to change than see a change and have to go and look for a reason.

That's great. If you're making that pay, Godspeed to you.

FA does work, sometimes fabulously, sometimes it fails.

TA does work, sometimes fabulously, sometimes it fails.

The decision for the individual is what will work best for them. I do consider FA in the macro sense and I am now forced to consider it because of the little job I have, but in my own trading operations, it is nearly irrelevant.

TA works for me. FA works for you. Different objectives of course, but both work as intended.

But only the cognitively biased indulge in this puerile TA/FA is better rubbish. It's a bit like saying thoroughbreds are no good. That might resonate to a dressage rider, but a gallops trainer would have you committed. A Clydesdale is no good for either pursuit, but it sure can pull a heavy load.

Horses for courses. All are horses, exactly the same biological species, but bred for different objectives. Arguments over which breed is best is all relative, wouldn't you say?

Julia · 29 May 2008

Re: Charts vs Fundamentals

nioka said:
Now if everyone believed 100% in charts they would be a self fullfilling prophecy. If a chart says BUY and everyone buys then the price would rise with the buying pressure. If a chart says SELL then everyone would sell and the price would fall. The chartists would say "see, the charts were right".

Couldn't you equally put the same argument with respect to analyst recommendations? e.g. if six brokers come out with a Buy on a stock on any given day, there is a pretty reasonable chance buying in that stock will increase.

It would be interesting to have a study conducted over retail investors/traders to ask what criteria they employed before buying.
I suspect the proportion using charts alone would be less than is required to skew the price.

nioka · 29 May 2008

Re: Charts vs Fundamentals

wayneL said:
Horses for courses. All are horses, exactly the same biological species, but bred for different objectives. Arguments over which breed is best is all relative, wouldn't you say?

Good post wayne, That is exactly the point I am trying to make. Had to be a little controversial to get a reaction.

nomore4s · 29 May 2008

Re: Charts vs Fundamentals

Julia said:
Couldn't you equally put the same argument with respect to analyst recommendations? e.g. if six brokers come out with a Buy on a stock on any given day, there is a pretty reasonable chance buying in that stock will increase.

It would be interesting to have a study conducted over retail investors/traders to ask what criteria they employed before buying.
I suspect the proportion using charts alone would be less than is required to skew the price.

Also most TA's would probably be using different forms of TA therefore getting different buy signals at different times.

Most TA's recognise that earnings are what will eventually drive the sp.

But I for one have no interest in reading mountains of annoucements and financial mumbo jumbo which are pretty much all greek to me anyway.
Am happy to learn to read a chart and manage my trades that way, whereas a FA probably has no interest in the chartists mumbo jumbo.

Like Wayne has said horses for courses, don't really understand the whole FA vs TA thing. Just because you do things one way that works for you doesn't make it the best or only way for everyone else.

wayneL · 29 May 2008

Re: Charts vs Fundamentals

nomore4s said:
But I for one have no interest in reading mountains of annoucements and financial mumbo jumbo which are pretty much all greek to me anyway.
Am happy to learn to read a chart and manage my trades that way, whereas a FA probably has no interest in the chartists mumbo jumbo.

Like Wayne has said horses for courses, don't really understand the whole FA vs TA thing. Just because you do things one way that works for you doesn't make it the best or only way for everyone else.

Another factor I think is how the person's brain is wired. "They" say there are seven different types of intelligence. Someone who is mathematically brilliant, might have inadequate communicative/linguistic intelligence. A brilliant word-smith might not be able to add two and two together. Someone with excellent visual/spatial ability, might not be ably to communicate OR add up.

Yet all of the above are intelligent in their own way.

Some see a chart and see nothing of use, yet can forensically examine financial statements and spot the real story in a jiffy. Some see rows of very large numbers and immediately break into a cold sweat, yet can spot useable patterns on a chart and mark them up in less time than it takes to have a decent fart.

Balance sheets are sheer drudgery to me. I would rather eat gravel and stick needles in my eyes than plough through all that. Once more, I can't see the story behind the story, but I can spot patterns almost instantaneously, so TA suits.

motorway · 29 May 2008

Re: Charts vs Fundamentals

Here is a little of a Walmart Vs K-mart study..

It is a paper on information and How it disperses from the few to the many..

Really It could have been titled why are there trends in stock prices..
And What do trends tell Us..

In the beginning No one really knows
Then a few,, eg Walmart Knew it was doing well .

It knew it was taking customers off the majors ( Those people in the regional Towns stopped travelling To the bigger centres )

Savvy investors No doubt caught on.. Also those just lucky to be come aware of it..

For a long time .. Walmart had a huge uptrend in it's share price

while

K-mart... back and filled and churned and started to slide..

For a long time broker's called K-mart a buy..
For a long time not many were buying Walmart

After the event everyone Knows the story

eg When something like BHP goes up for five years

We all know the reality of the China Story.. And WHY We should have bought BHP and not TLS.... But at the time , At the turning points... Maybe the charts were the only things
urging everyone Who wanted to look where the trend was forming..

Some good points below

There are two basic questions about the financial markets: how efficient are
the markets and will the markets become more efficient over time.

A way to assess the validity of a theory on share prices of firms is to
examine its consistency with theories on other aspects of firms.
From the efficient market theory, a company’s stock has a high return because of some
unforeseeable events that cannot be predicted.

However, from the researches in business strategy, a company does well often because it persists in a good strategy for a long time before the competitors and the stock market react.(Collins and Porras, 1994)

Take Wal-Mart as an example. One of its most
important strategies is to set up large discount stores in small communities.
The early entry of one large store in a small community preempts the entry
of other big stores.
The resulting local monopoly ensures high level of profit.

Since the value of information is positively related to scarcity, a player
adopting a superior strategy will keep quiet about it. To keep a low profile,
Wal-Mart avoided opening new stores where Sears and K-mart already had
existence.

This gave other giant retailers the impression that Wal-Mart was
not very competitive.
Hence other retailers were less likely to imitate the
strategies of Wal-Mart.

In fact, the strategy of local monopoly in small rural
communities was not copied by other giant retailers such as Sears and Kmart
for a long time for they thought small communities were a too small market for
big players.

The extensive time lag in adopting a superior strategy from a
competitor is not consistent with efficient market theory, but is a natural
result from information theory.

Although mature companies in stable industries have been
heavily studied, the emergence of new industries or new organizational
structures, which are not well understood by the investment public, may
seriously affect the real value of companies.

For example, the emergence
of Wal-Mart greatly affected the value of Sears, Kmart and the other established
retailers. So even if one did a lot of research on Sears, You would not have been able to
value Sears accurately if you did not understand the growth dynamics of
Wal-Mart.

Information, entropy and evolutionary finance
Jing Chen

This why I use charts
not to track psychology or sentiment
or patterns etc

But information KNOWN by the few
BEFORE it is known by the many..

Information that might be impossibly dispersed
to ever gather together by one person.

Charts do not predict

They reveal..

motorway

Tradert · 30 May 2008

Re: Charts vs Fundamentals

nioka said:
So many traders talk charts all the time.A certain formation on the chart is supposed to mean so much to so many.

Trading in a nutshell is managing risk and playing probability. Patterns are useful in defining targets and stops. With that been defined, an important evil is eliminated from managing your trades – Human emotion.

Investing with buy and hold approach is a different ball game. As some one said earlier in this thread - it's horses for courses.

Stick to what works for you and keep an open mind. You never know you might end up learning something new.

cuttlefish · 30 May 2008

Re: Charts vs Fundamentals

One misconception I often see is the assumption that fundamental investing equates to a 'buy and hold' strategy.

An active fundamental investor will adjust their position sizes and open or close positions based on changes in the fundamentals.

The fundamental outlook can change quite frequently - influenced by overall economic factors like interest rates, consumer sentiment, commodity prices, wages growth, industrial and political factors, competition etc. Then in the company itself their operating performance may vary from expectations and cause a re-rating (upwards or downwards). There can also be management changes, legal or structural changes, issues of capital, taking on of debt, deals with other companies etc.

Also the relative fundamental outlook vs other stocks in the sector changes often as well and the 'value' of a stock based on its market capitalisation changes so if the price rises excessively this might be a reason for a fundamental investor to take profits as well.

Stop losses and money management also apply to a fundamental based strategy and thus can cause exits or reductions in position sizes as well.

So investing/trading based on fundamentals does not necessarily equate to 'buy and hold'.

Similarly there is no reason a technical trader can't identify a trend and then enter and ride it for years - effectively 'buying and holding'.

It is a poor strategy imo for a fundamental investor to enter a stock based on sound fundamentals but then cling to it as its fundamentals change to the negative.

Because of the effort that has gone into researching and understanding a stock done by a fundamental investor this can be easy to do. i.e. it can be easy to 'fall in love' with a stock and convince oneself that a negative event is just a temporary setback, rather than stepping back and re-assessing the stock objectively and unemotionally after each change that occurs.

haunting · 30 May 2008

Re: Charts vs Fundamentals

Charts do not predict

They reveal..

MW,

My applause. This in my view the essence of charts/TA.

nioka · 30 May 2008

Re: Charts vs Fundamentals

Cuttlefish,

I agree with all you say on the matter that is why I always say I am an investor who sometimes trades. I trade on the fundamentals and because I do not usually get a capital gains tax advantage means that I am in and out of stocks as I see their value change, often selling one because I see better value somewhere else.

tech/a · 30 May 2008

Re: Charts vs Fundamentals

nioka said:
Cuttlefish,

I agree with all you say on the matter that is why I always say I am an investor who sometimes trades. I trade on the fundamentals and because I do not usually get a capital gains tax advantage means that I am in and out of stocks as I see their value change, often selling one because I see better value somewhere else.

Would someone care to show in a live trading exercise exactly how a Fundamental trader does this PROFITABLY.
Ive never seen it.

Those that I have seen are killed by losses.
Due to the sad lag between price and valuation.

The price drops like a stone before the Fundamentalist has re valued the stock. Its only after the drop that the value of the stock is even questioned---well from what Ive seen.

Charts vs. Fundamentals

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