Technical Analysis vs. Fundamental Analysis

[DocK]

Yes and No. I know where you are coming from.

Obviously if you don't care about fundamentals you are not trying to predict where its going. however you are trying to predict a percentage of winning trades.

You are trying to predict where the share price is going and relying on it to change substantially.

You are using semi -proven human behaviour patterns to predict in which direction the share/market changes.

Sure, you are using capital management so you don't have to be right all that often.

You need positive expectancy to make money. You need an edge.

That's why you test the theories before implementing them. You can't tell me that all people who try to use technical analysis do well. There are many who lose, just as occurs (probably even more so) in fundamental investing.

Agreed, there are many who lose using either system, or even a combination of both. I was simply making the point that quite often technical analysts are not concerned with predicting where the market may be heading - just on reacting to what it does. As you say, you're relying on the "edge" to make the money, and the "edge" has probably been based on historical data. I guess it's fair to say that the "edge" relies on markets/humans behaving in the established pattern used in the historical data - so yes, in a way the technical analysis "predicts" that those established patterns will be repeated in the future. I guess that is why a trend-following system will not perform particulary well in a prolonged sideways market

Sorry if it's come up somewhere before but whats wrong in taking both sides here. Rather than Analysis vs Fundamentals why cant the two work together as a tool to buy shares? Does it have to be black and white?
I tend to look at both when buying a share. Even as an example with RED the Tech analysis won out over the fundamentals here but even so i dont think i would be in the black with that particular share if it weren't for the technical charts of the the share. Unless fundamental means long term i dont see any reason for the two work as one.

Agreed again. Although I prefer technical analysis for myself, I can't say I've never bought a share in a company that I feel is well run and has proven profitable performance, but has been beaten up by poor sentiment. Once in the trade I'd use technical analysis to set an exit - rather than trust in my own "prediction" of where I think true value sits. I'm not fanatically set on one method or the other - whatever works for you I reckon - and I'd say that would be a combination of both methods for quite a few.

 

[Julia]

Sorry if it's come up somewhere before but whats wrong in taking both sides here. Rather than Analysis vs Fundamentals why cant the two work together as a tool to buy shares? Does it have to be black and white?
I tend to look at both when buying a share. Even as an example with RED the Tech analysis won out over the fundamentals here but even so i dont think i would be in the black with that particular share if it weren't for the technical charts of the the share. Unless fundamental means long term i dont see any reason for the two work as one.

Refreshing to find some sensible and balanced comments on this thread instead of the usual vehement criticism of FA by TAs and vice versa.

 

[robusta]

Back in October 2010 robusta issued the challenge.

Anyway here we are 18 months from the original post and i though it would be interesting to see how the comparison of robusta's "value" portfolio was travelling against both my portfolio of discretionary "cheap high dividend" stocks and the ASX200

Looks like im way out in front of both robusta and the ASX200
~

Well done So_Cynical, you have outperformed by a fair margin. Sorry I missed this post.

My buy and hold strategy does appear to be lacking with these stocks, I would probably like to ditch MCE and take profits on CBA and CSL but as I don't have any fancy software this may be too much hassle as I remember we were including dividends as well.

That is not to take anything away from your performance, you have made money out of companies I would never consider.

 

[tech/a]

There are NO SECRETS and here they are!

Firstly ALL analysis "works" in a bull market. Anyone can make a profit in a strongly trending bull market--just ask your local taxi driver.

Its pretty common knowledge and one of the TRUE truisms of trading/investing that the market will trend 30% of the time and either distribute or accumulate in consolidations during the other times--70 %.

Its also true that there will be trends in sometime frame at any one time--during consolidations.

So if we are going to trade/invest profitably we best be able to recognise that we need to find a trend 1 bar or more--in a time frame so we can profit.

Our analysis---at best--- points us to set-ups which give us the ability to anticipate price action both--- Fundamental and Technical. At best its a 50/50 result over very long periods but by identifying where we are in a move (Consolidation or Trend) in a time frame we can be better prepared to trade or invest in the time frame chosen. Its not about quantity or quality of information---just look at the PEN or RED threads. Nor the pattern or
Past history of a chart. At best BOTH place us in a position of ANTICIPATION.

We should be constantly looking for set-ups which point to a trend --- be it within a lower time-frame in a consolidation or a breakout in any time frame.

Most trends last longer than expected and most consolidations resist breaking out in either direction longer than expected.
In the short term we can identify time periods which are likely to trend in a direction for a number of bars ( Trend or Counter trend trades).This can swing the odds in our favour---giving us one string to the bow of profit---anticipation.

Radge once said that " It doesn't matter if your wrong---only how long you stay wrong "

So the best way to minimise loss through being wrong too long is to have either a stop loss---OR a mechanism in your analysis which tells you that your analysis is wrong---quick enough to mitigate risk.

"Let your winners run"

The next string to the bow. You need to have either an anticipated target OR a mechanism to determine the end of your trading trend in your time frame which maximises your time in a trade in your chosen direction.

You see there are ONLY 3 ways (Other than Arbitrage) That you can profit from your Trading/Investing.

More aggregate winning profitable trades than aggregate losing trades.
OR
Bigger aggregate Winning trades to Aggregate losing trades.
OR
A combination of both.

If you know the above and you've put those understandings in place you'll be trading time frames and set-ups that in the long run will deliver you positive expectancy through your trade management and the understanding that there are NO SECRETS.

The traders trap is to constantly buy that new book or try that new trading technique
in the hope that it will find and give an EDGE.

That edge is staring you in the face
REGARDLESS OF METHOD USED.

 

[nulla nulla]

Welcome back T/A

 

[Spongle]

As an investment newbie soon to come onto a modest amount of cash I find myself wrestling with the TA vs FA issue...

When I first found all this garbage interesting (bout 2yrs ago) I found myself drawn to Technical analysis as I enjoy poring over charts and trying to find re-emerging patterns that could predict future actions more than half the time.
I figured that certain patterns reflect certain behaviour and that said patterns were likely to repeat themselves as they reflected the actions of human beings and were more than likely to reoccur.

Barring significant external factors relating to the market it seems (from my meager efforts utilising technical analysis) that TA works but seems to be an art more than a science. The hardest part appears to be a) finding a good example of a chart that stands out enough to be exploited b) not seeing things in a chart that arn't there
c) figuring that when I do see something it will probably only work about 60 - 70 % of the time (again: I am an amateur at this stuff)

Calculating the fundamentals interests me much less but seem to hold alot of weight re a) purchasing securities at lower prices b) giving peace of mind re overt pessimism/optimism in the market c) knowing that a security should hopefully reach a mean price (between the ocsillations of price over various time periods) that will occur and be profitable to a stockholder and d) be a sound investment AND a stock that can be traded not just the latter.

Use both I figure... why not hey?

 

[systematic]

Use both I figure... why not hey?

Absolutely agree! And not necessarily together even.

 

[Value Hunter]

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 and managed to actually keep it until death. 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?

Technical analysis is absolute non-sense and has no basis in fact. In fact calling it analysis is akin to labeling a tarot card using fortune teller an analyst.

 

[AlterEgo]

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 and managed to actually keep it until death. 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?

Technical analysis is absolute non-sense and has no basis in fact. In fact calling it analysis is akin to labeling a tarot card using fortune teller an analyst.

You clearly have no idea! Tell that to the prop firms that are taking large sums of money out of the market on a consistent basis, and all the firms running HFT systems, etc. You think that's just luck?

I think many people using fundamental analysis have little idea as to what technical analysis really is, or rather, little idea of the methods the successful technical people are using. There are methods that don't use fundamental info (and therefore must be regarded as 'technical'), but do not rely on interpretation of 'squiggly lines' like moving average crossovers, MACD, Head & Shoulder patterns, etc. I personally don't think much of that type of stuff works (although I could be wrong), however there are other non-fundamental methods that do work. But I'm not about to go in to detail about that, as I reckon you're just a troll trying to get a bite (why else post the same message in 5 different threads). Or else you are very closed minded to other ways of doing things. Just because you haven't been able to make money that way, or just because you just don't understand it, or it doesn't make sense to you, doesn't make it invalid.

Anyway, that's all I have to say on the matter. I'm not going to get in to an argument with you about it. It makes no difference to me what you believe.

 

[cynic]

You clearly have no idea! Tell that to the prop firms that are taking large sums of money out of the market on a consistent basis, and all the firms running HFT systems, etc. You think that's just luck?
....
Anyway, that's all I have to say on the matter. I'm not going to get in to an argument with you about it. It makes no difference to me what you believe.

By responding, you actually did enter into an argument.

I do agree that those comparing T/A to voodoo know nothing whatsoever about the practice of voodoo!

Fortunately, not all F/A practitioners think that way and some of them have been known to complement their trading with a smattering of T/A!

 

[Value Hunter]

I am no expert on high frequency trading but from what I have read in articles and seen in documentaries the majority of high frequency trading systems seem to make money by front running large buy or sell stock orders (usually from institutional investors). Many of them have very high computing power, the highest speed internet, have their computers close to the exchange where orders are processed in order to get an advantage in terms of trade execution by a few milliseconds.

In addition to that there have been many claims of market rigging (accompanied by investigations) in regards to high frequency traders who somehow get leaked or insider access to classified information so they know the what orders will be placed before they are actually visible to the market.

I doubt many high frequency traders legitimately make money from technical indicators. However that being said I admit I do not know too much about the topic and I could be wrong about all of the above. Simply put high frequency trading is something I care little about because it doesn't affect my investing strategy at all (buy assets at or below intrinsic value).

 

[Value Hunter]

Cynic in my opinion a proper fundamental analyst does not consider technical indicators at all. To me it shows they either lack confidence in their valuation or investing process as a fundamental analyst or they lack patience in waiting for their return to be realized. If you can't confidently value a business or you don't have the necessary patience to wait for your return to come then you should not be using fundamental analysis at all.

The only billionaire I know of who uses technical analysis is George Soros. He is a speculator not an investor and he primarily uses fundamental and psychological analysis as well as inside information possibly sometimes with a little bit of basic technicals thrown in.

 

[cynic]

I am no expert on high frequency trading but from what I have read in articles and seen in documentaries the majority of high frequency trading systems seem to make money by front running large buy or sell stock orders (usually from institutional investors). Many of them have very high computing power, the highest speed internet, have their computers close to the exchange where orders are processed in order to get an advantage in terms of trade execution by a few milliseconds.

In addition to that there have been many claims of market rigging (accompanied by investigations) in regards to high frequency traders who somehow get leaked or insider access to classified information so they know the what orders will be placed before they are actually visible to the market.

I doubt many high frequency traders legitimately make money from technical indicators. However that being said I admit I do not know too much about the topic and I could be wrong about all of the above. Simply put high frequency trading is something I care little about because it doesn't affect my investing strategy at all (buy assets at or below intrinsic value).

It's great that you are comfortable with your choice of trading style.

As you'll have noticed from these threads, at times there can be disputes over which religion is superior. It doesn't have to be like that!

The virtues of F/A can be extolled without spitting on other analytical approaches. Having said that, I do enjoy a good bun fight!

 

[Value Hunter]

"Let your winners run"

The next string to the bow. You need to have either an anticipated target OR a mechanism to determine the end of your trading trend in your time frame which maximises your time in a trade in your chosen direction.

You see there are ONLY 3 ways (Other than Arbitrage) That you can profit from your Trading/Investing.

More aggregate winning profitable trades than aggregate losing trades.
OR
Bigger aggregate Winning trades to Aggregate losing trades.
OR
A combination of both.

If you know the above and you've put those understandings in place you'll be trading time frames and set-ups that in the long run will deliver you positive expectancy through your trade management and the understanding that there are NO SECRETS.

The traders trap is to constantly buy that new book or try that new trading technique
in the hope that it will find and give an EDGE.

That edge is staring you in the face
REGARDLESS OF METHOD USED.

I firmly agree with you on letting winners run (but from a fundamental perspective). If you have bought shares in such a company that keeps increasing their earnings (companies like Cochlear, CSL, Resmed, REA Group, TPG Telecom, Dominoes Pizzas, etc) do not sell the shares just to take a profit, even if the shares get somewhat overvalued. However if a company keeps putting out consistently poor results you should consider selling even of the shares may appear to be undervalued (a.k.a. a falling knife or value trap).

As Peter Lynch pointed out always cut the weeds and water the flowers, not the other way around!

 

[cynic]

I firmly agree with you on letting winners run (but from a fundamental perspective). If you have bought shares in such a company that keeps increasing their earnings (companies like Cochlear, CSL, Resmed, REA Group, TPG Telecom, Dominoes Pizzas, etc) do not sell the shares just to take a profit, even if the shares get somewhat overvalued. However if a company keeps putting out consistently poor results you should consider selling even of the shares may appear to be undervalued (a.k.a. a falling knife or value trap).

As Peter Lynch pointed out always cut the weeds and water the flowers, not the other way around!

In one of your earlier posts you mentioned that you were aware of the misuse of inside information by some traders.

What do you think those insiders might be doing prior to the information becoming public?

Can you see how this might affect the price behaviours of affected securities (and derivatives thereof)?

Does this not suggest that price action can give useful clues, portending changes in a company's fortunes well ahead of any public announcements?

 

[Value Hunter]

Cynic absolutely insider trading goes on. I have noticed in the days or week leading up to a profit upgrade many stocks quietly trend higher. At the end of the day if a company is doing better than expected many employees (I am not just talking about the top management) will know about it. Even if they don't directly buy shares for fear of being accused of insider trading they may tell family and friends who will buy shares leading up to the announcement pushing the shares up.

But overall I still don't think its a reliable indicator. Besides by the time you realize the shares are trending up before the announcement it is too late and most of the gain has already been made as it typically happens within a short window (from my observation anywhere between one or two days and a week or slightly longer sometimes)

As for traders if they have the right connections they can get information. E.g. a trader went to the same university and is friends with the chief operating officer of a listed company. They go out for a few drinks one night and some privileged information is exchanged. A lot of hedge fund types and CEOs operate in the same social circles.

Also hedge funds especially if they are owned by investment banks with a market making division or brokerage firms etc sometimes get leaked access to client trade order books/ledgers.

I don't think price action is a reliable indicator though. Even if a few people have inside information often their impact on price and volume is overwhelmed by the actions/trades of those who do not have inside information thus muddying the signal.

 

[cynic]

Cynic absolutely insider trading goes on. I have noticed in the days or week leading up to a profit upgrade many stocks quietly trend higher. At the end of the day if a company is doing better than expected many employees (I am not just talking about the top management) will know about it. Even if they don't directly buy shares for fear of being accused of insider trading they may tell family and friends who will buy shares leading up to the anouncement pushing the shares up.

But overall I still don't think its a reliable indicator. Besides by the time you realize the shares are trending up before the announcement it is too late and most of the gain has already been made as it typically happens within a short window (from my observation anywhere between one or two days and a week or slightly longer sometimes)

It's great that you recognise this. So how do those one or two day windows compare to the timing of company reports and announcements?

By the way, I am not saying that your choice of F/A is wrong. Many arts are known to have a mixture of advantages and disadvantages.

Styles of market analysis, whether they be T/A, F/A other, are certainly no exception.

 

[craft]

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 and managed to actually keep it until death. 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?

Technical analysis is absolute non-sense and has no basis in fact. In fact calling it analysis is akin to labeling a tarot card using fortune teller an analyst.

The same thing lays at the core of success in any method. If you understand one method well enough to see the core essence of success you shouldn't have too much trouble seeing how other tools could be used.

Dishing another person's tools is normally a sign of lack of deep understanding in your own approach. I thought on this site our role as FA practitioners was to defend against such short sighted opinions, what's with the attack across so many threads?

 

[galumay]

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

What is your reason for posting the same provocative comment across 5 threads in the forum? It seems to me there must be an agenda.

I hold no trunk with T/A, from my background of mathmatics, science and rational thought I cant take it seriously - none the less its an approach to speculating and even to investing, that very many people adopt as a strategy, so they must be comfortable with it.

I would be rather surprised if people who use T/A as their primary tool in their strategy would be particularly interested or concerned about what those of us who use F/A as the primary tool think!

It shouldnt be a evangelical approach, why would I care what strategy others use? Why would I care what they think of my strategy.

Whats important is to find an investment or trading strategy that is a good fit for your personality and that you are comfortable wearing day in day out, through volatile sideways, bull and bear markets - and that in the long run provides an acceptable rate of return!

 

[pixel]

On another Forum, which has since folded, we had a fundamentalist who flooded every discussion with his views on how one should be investing. Funny thing is, I met him on a seminar series covering some basic T/A., where, it is probably fair to say, he did not excel.

Based on his own interpretation of both, he bought CVN all the way up to 80c. ... and held all the way down to sub-10c. Technical Analysts suggested rather strongly to sell, each time a technical support level failed to hold. One even stuck his neck out and gave the next low target to the decimal. Our hero rejected every one of them, defending his staunch support as F/A-based.

My point is: Some investors are good at what they're doing. Some may not quite "get it".
As a Mathematician, I don't have to take sides.

PS: I agree with galumay and others. The number of times an opinion is repeated bears no relation to its validity.