Tuesday, February 8, 2011

Technical Analysis or Fundamental Analysis

This post is the result of a question from a reader who asked me if I could elaborate on why I chose technical analysis over fundamental analysis as I had mentioned in My Story: Part 3. More qualified men than me have fought long and hard over the relative merits and demerits of technical analysis and fundamental analysis and never reached an agreement on which is the more successful method. Discussing this topic is like opening a can of worms and almost always generates passionate responses from both sides. So, let me start by adding a disclaimer that the following are just my views on why I personally trade using technical analysis rather than fundamental analysis.

My main problem with fundamental analysis is that it assumes that you know better than the market. You take a position in a stock that you feel is undervalued or at the very minimum, the market is not discounting the future growth or value of the company properly. Whereas as a follower of technical analysis, I assume that the market knows best and all the news regarding the company, past , present and, even future is reflected in the current price of the stock. All I do is follow the price and volume of a stock.

I am in no way qualified or knowledgeable enough to read the books of the companies but the more basic question is, how much trust can I place in the balance sheets etc of the companies in general. I don't have to give you readers examples of companies coming up with novel methods to cook their books. 

You can find a lot many more advantages of technical analysis over fundamental analysis in any technical analysis book (or vice-versa in any fundamental analysis book!). But perhaps the most important reason for choosing one method over the other is that your style of trading should complement your personality. Personally speaking, I have no patience to stay put in a growth story that might take years to develop. While value investors might see a falling stock as a golden opportunity to add some more at a lower price, I am very impatient with my losing trades and can't wait to get out of them. 

To wrap things up, we can argue about the demerits and merits of technical and fundamental analysis all day long and both sides can come up with examples of great traders who have been very successful using one method over the other, but the bottom line is the best method is the method that works best for you. And the method that works best for you is one that best suits your personality. Go discover yourself!

Take care and good luck!


Anonymous said...

I trade using technicals, yet one of the first things I do after finding a chart I like is go to the research page and find out when earnings are due out. I don't want to be holding during any earnings release [anymore, lessons learned].
But, even if I like or love the chart, I have to glimpse at earnings/revenue growth rates, financial strength, etc.

For me, although I prefer charts, I also like to have as much info as possible. What's the purpose of buying a good chart set up in the A.M., if last nights 8K filing is announcing an acquisition that the company is overpaying for and is more of a 3-5 year "growth" strategy that will cause a hit to earnings for the next 4 quarters?

positiontrader said...

Even I check for when the company is reporting before getting in a stock as I never hold a stock during its earnings. No exceptions to that rule. I scan the recent news items via freestockcharts which shows the news next to the charts, so that is pretty convenient. But that's pretty much all I do.

Bill said...

Analyzing the stock market is like anaylizing the criminally insane, you have no idea why it does what it does but it has basic strengths/weaknesses and a pattern nonetheless.