Technical Analysis vs. Fundamental Analysis

[Rainman]

It's funny how everyone takes these discussions as personal attacks.

Be open minded, learn both TA and FA and use both/either, whatever works for you.

Yes, I noticed that. Thin skin is the sign of the amateur.

 

[Quant]

Yes, I noticed that. Thin skin is the sign of the amateur.

I would go one further ... Those who regularly test the skin thickness of others are also exhibiting the sign of an amateur ...


Thanks for listening , i have nothing further to add on this subject ;-)

 

[hamli]

It will be hard to compare returns. People perform fundamental analysis and technical analysis in different ways.
They look at different things.

So you can't take a few FA results and compare it against a few TA results. Not everyone approaches FA/TA the same way. And you would also then need to find 'purists' who completely ignore the other method.

 

[Boggo]

It's funny how everyone takes these discussions as personal attacks.

Be open minded, learn both TA and FA and use both/either, whatever works for you.

I agree hamli.

I do get a bit wound up (in case nobody noticed ) when I see comments and criticisms of TA by people who don't understand it.

In 17 years of trading/investing I have tried just about everything in existence. Fundamental worked for a while and I thought I had found my saviour until I started to see the lag, inaccuracies and flaws in the info I was dealing with.
Throw in a down market (approx 17% of the market life) and you can easily undo a years value in a couple of months.

Look at the investors who held TLS all the way down from around $9, all you heard was "it's a bargain at these prices" and "dividend yield is going up" which in itself highlights the fact that basic calculations are misunderstood.

I found that the entry into stocks often differed very little between TA and FA even though FA usually lagged quite a bit. The big difference was the protection of investment value, ie, when it starts to turn down then TA doesn't give back profits.

There are stocks that I have held for quite a while that may have sound FA, two of my longest holds, SYD for close to a year now and BAP since Feb '15 but I bought and monitor from a TA perspective.
Some might see this as investing, call it what you want but to me as long as they are creating value before I get an exit signal I will hold, TA in and TA out.

Quite often I get the usual, "if you had bought and held CBA" etc, sounds great, I might be holding the next CBA in one of my current holdings, TA will alert me if that is not the case.

Recently I had an investor mate say he was going to buy CBA because "at these prices" etc.
I pulled out my old excel spreadsheet from the days when FA was going to be my saviour, put in some rubbery figures and came up with a valuation of nearly $84 (that I wouldn't trust), he was happy as a pig in poop just on that news, seems to be all he needed !!!!

When people suddenly pop up and start canning TA then up goes the red flag, I think I have put in enough hard yards on both methods to 'highlight' that they have just decided to pick a side and they will apply the fruit bat approach to the other side, ie if you can't eat it then you just **** on it so no one else can eat it.
There is however an advantage in applying TA to fundamentally sound stocks though in most cases you are already holding before the FA theory kicks in and the fundies arrive to support your head start.

Anyway, after all that, tomorrow morning I am taking my wife to Europe and the the USA for a month, business class courtesy of TA

Tootle pip kiddies

 

[Value Hunter]

Boggo if you have really made that much money from squiggly line voodoo then I tip my hat to you sir.

 

[Newt]

Hmm, I seem to recall discussions in the SMSF returns thread about the variety of methodologies for calculating return. Comparing different methodologies for return (in an ideal world) I'd be keen to know:

- Average % return over >5years
- Time to learn and become profitable (I'm not interested in what the "Olympic" class traders can achieve, more interested in average Joe with a day job)
- Time/week to maintain methodology/trades
- % Drawdowns

Would it be reasonable to infer to FA traders are more likely to have a personal bias towards longer term position trades, rather than the cut and thrust of intraday/daily/weekly TA trading? Getting a good methodology fit to personality is something I'm a strong believer in.

 

[hamli]

I don't see how it is possible to assign a 'return' on TA vs a 'return' on FA.

Some one in TA might use:
1. Bollinger bands
2. Candle sticks
3. Fibonacci Retracements
4. Market Profiles
5. % R indicator

Then some might trade:
1. Intra day
2. Short-time frame - weekly
3. Medium-term - months

And then, just because the candlestick person couldn't make it work, doesn't mean that TA is horrible. Or just because the bollinger band person had poor results, and skewed the results down, doesn't mean there aren't highly profitable methods out there.


Then the fundamental person:
1. Might only look at PE ratios across the sector
2. Others might compare one company against all their competitors strategy wise
3. Others might look at macro economics

Then some might:
1. Hold forever and never sell.
2. Hold and sell once target reached (which could be short-med term)
3. Cut losses on poor macroecomics, change in management or poor strategy.

Just because one FA person holds forever, doesn't mean that all FA people hold forever. Just like you can't assume that all TA would have signalled a buy prior every uptick and would have a triggered a sell prior every downtick.

So how do you compare TA results vs FA results in a fair way, without throwing out blanket assumptions?

 

[pixel]

I agree hamli.

I do get a bit wound up (in case nobody noticed ) when I see comments and criticisms of TA by people who don't understand it.

In 17 years of trading/investing I have tried just about everything in existence. Fundamental worked for a while and I thought I had found my saviour until I started to see the lag, inaccuracies and flaws in the info I was dealing with.
Throw in a down market (approx 17% of the market life) and you can easily undo a years value in a couple of months.

Look at the investors who held TLS all the way down from around $9, all you heard was "it's a bargain at these prices" and "dividend yield is going up" which in itself highlights the fact that basic calculations are misunderstood.

I found that the entry into stocks often differed very little between TA and FA even though FA usually lagged quite a bit. The big difference was the protection of investment value, ie, when it starts to turn down then TA doesn't give back profits.

There are stocks that I have held for quite a while that may have sound FA, two of my longest holds, SYD for close to a year now and BAP since Feb '15 but I bought and monitor from a TA perspective.
Some might see this as investing, call it what you want but to me as long as they are creating value before I get an exit signal I will hold, TA in and TA out.

Quite often I get the usual, "if you had bought and held CBA" etc, sounds great, I might be holding the next CBA in one of my current holdings, TA will alert me if that is not the case.

Recently I had an investor mate say he was going to buy CBA because "at these prices" etc.
I pulled out my old excel spreadsheet from the days when FA was going to be my saviour, put in some rubbery figures and came up with a valuation of nearly $84 (that I wouldn't trust), he was happy as a pig in poop just on that news, seems to be all he needed !!!!

When people suddenly pop up and start canning TA then up goes the red flag, I think I have put in enough hard yards on both methods to 'highlight' that they have just decided to pick a side and they will apply the fruit bat approach to the other side, ie if you can't eat it then you just **** on it so no one else can eat it.
There is however an advantage in applying TA to fundamentally sound stocks though in most cases you are already holding before the FA theory kicks in and the fundies arrive to support your head start.

Anyway, after all that, tomorrow morning I am taking my wife to Europe and the the USA for a month, business class courtesy of TA

Tootle pip kiddies

Enjoy the trip, Boggo.
You and your wife deserved it!

... oh, and come back happy and relaxed. We need people like you who can talk sense.

 

[Rainman]

I don't see how it is possible to assign a 'return' on TA vs a 'return' on FA.

Are you serious?

You look at the amount of equity that you have (whether you're a TA or an FA guy) at the beginning of the period under equiry and then you look at the amount of equity that you have at the end of the period - adding or subtracting from the return for the period any realised or unrealised gains or losses on positions still open at the end of the period.

Is that so hard?

 

[Boggo]

Enjoy the trip, Boggo.
You and your wife deserved it!

... oh, and come back happy and relaxed. We need people like you who can talk sense.

Cheers pixel

 

[hamli]

Are you serious?

You look at the amount of equity that you have (whether you're a TA or an FA guy) at the beginning of the period under equiry and then you look at the amount of equity that you have at the end of the period - adding or subtracting from the return for the period any realised or unrealised gains or losses on positions still open at the end of the period.

Is that so hard?

People conduct TA and FA in different ways.

You can't make a blanket assumption and assume a person using TA will have the same result as another person using TA. They have their own methods.

Same as FA. You can't assume one persons result is reflective of another

And what's to say that they are 'purists' and totally ignore the FA/TA.

How do you expect to control for these variables?

 

[galumay]

Ultimately it all comes down to what you are more comfortable with, there are also TA's that have made significant amounts of money over the long term, and obviously there are a notable bunch of FA's that have made immense fortunes from it - but neither will work if you dont have a personality that aligns with the strategy.

TA makes no logical sense to me, FA i can understand and it suits my personality, I have no wish to convince anyone else of anything - and thats the bit that gets on my goat - the evangalists on both sides of the debate who have some innate desire to convince others that the strategy and philiosophy towards investment they have adopted is superior.

To me that is simply a sign of insecurity.

At least we have a strategy, so many people go right through life with no strategy at all towards investment and if they do 'invest' some money it will be based on a hot tip from Bob at the pub on Friday night!

 

[Rainman]

... You can't make a blanket assumption and assume a person using TA will have the same result as another person using TA. They have their own methods.

Come on. We are not trying to determine the number of angels sitting on a pinhead here.

If you have two fund managers - one adopting an FA approach and the other adopting a TA approach - and you give them each the same amount of starting capital to manage over a 3, 5 or 10 year period, are you telling me that the percentage return that each manager is able to generate on that starting capital at the end of each period does not tell you which manager had the better performance?

... And what's to say that they are 'purists' and totally ignore the FA/TA.

Boggo and tech/a seem pretty pure TA guys to me.

 

[hamli]

Come on. We are not trying to determine the number of angels sitting on a pinhead here.

If you have two fund managers - one adopting an FA approach and the other adopting a TA approach - and you give them each the same amount of starting capital to manage over a 3, 5 or 10 year period, are you telling me that the percentage return that each manager is able to generate on that starting capital at the end of each period does not tell you which manager had the better performance?



Boggo and tech/a seem pretty pure TA guys to me.

It will tell me who the better/luckier manager at that point in time for the market condition was. It will tell me little about whether TA is better than FA.

 

[Rainman]

It will tell me who the better/luckier manager at that point in time for the market condition was. It will tell me little about whether TA is better than FA.

Luck?

Luck might explain a difference between two levels of performance across 1 year. It might even explain a difference between two levels of performance across 2 years. But if you are saying that it would explain a difference between two levels of performance across 5 years, let alone, 10 years, then you are deluding yourself.

 

[hamli]

Luck?

Luck might explain a difference between two levels of performance across 1 year. It might even explain a difference between two levels of performance across 2 years. But if you are saying that it would explain a difference between two levels of performance across 5 years, let alone, 10 years, then you are deluding yourself.

If that is all you got from it, then I rather talk to a rock.

 

[Rainman]

If that is all you got from it, then I rather talk to a rock.

That's because you can't accept that where an investor across a 5 to 10 year period earns meaningfully higher returns than another investor having the same amount of capital to manage, that says nothing about the investment styles both adopt.

That is a demonstrably foolish claim to make.

 

[skyQuake]

Anyhow, getting back on topic

Come on. We are not trying to determine the number of angels sitting on a pinhead here.

If you have two fund managers - one adopting an FA approach and the other adopting a TA approach - and you give them each the same amount of starting capital to manage over a 3, 5 or 10 year period, are you telling me that the percentage return that each manager is able to generate on that starting capital at the end of each period does not tell you which manager had the better performance?

Boggo and tech/a seem pretty pure TA guys to me.

Except there's no figures out there to compare - technical funds don't exist because slippage kills it when trading any large sum of money. It also depends on how narrow you define TA. Bunch of futs trading shops (and individuals) making bank, and they're definitely not FA traders.

I'll use our very own Peter2's momentum book as an example. Its pure TA and he's done very well but that doesnt mean what he's doing now is possible with $100m under management.

 

[hamli]

That's because you can't accept that where an investor across a 5 to 10 year period earns meaningfully higher returns than another investor having the same amount of capital to manage, that says nothing about the investment styles both adopt.

That is a demonstrably foolish claim to make.

Yes, I said:
"It will tell me who the better/luckier manager at that point in time for the market condition was. It will tell me little about whether TA is better than FA."

But it's not my problem that you struggle to read.

 

[VSntchr]

Anyhow, getting back on topic
Except there's no figures out there to compare - technical funds don't exist because slippage kills it when trading any large sum of money. It also depends on how narrow you define TA. Bunch of futs trading shops (and individuals) making bank, and they're definitely not FA traders.

Great post. Brings some reality to the argument. This is also something that I think Craft has spoken of in his journey through from TA to FA.

I'll use our very own Peter2's momentum book as an example. Its pure TA and he's done very well but that doesnt mean what he's doing now is possible with $100m under management.

Do you have any estimate on what levels such a strategy may run into significant headwinds in terms of slippage?
I imagine that the effect is progressive and slowly eliminates more potential opportunities as your size outweighs your required liquidity. For a while the trader can potentially move to more thickly traded stocks without losing much in potential return as their focus can only manage a handful of positions anyway - thus the opportunity cost of foregone positions is low. But as size gets to a certain point, the tradeable universe is now so small that the strategy cannot find enough candidates to fill a portfolio, or at best - has a less preferential selection.