Is fundamental analysis better than technical?

Feel free to call me out if I'm misinformed, but it seems that most of the more successful investors/traders are fundamental analysis type people? which one has been proven over time to generate more money, the trader or the investor?

 

At the end of their careers, who made more, the trader of the investor?

"Hold on a sec...you mean they made all this money without doing IB --> PE --> HBS --> PE --> God? How is this possible?!?!?!!??" - TheKing
 
Best Response

Dickenscharles, for the sort of advice you're looking for, I think you'd be better off reading some books rather than asking questions on a forum. There's just no way to give a clear answer in this format.

Try The Intelligent Investor, by Benjamin Graham with the commentary by Jason Zweig. It contains two things you may find useful: one is a book about investing by one of the first rigorous fundamental analysts (at least, the first one who is widely known), and a commentary by a financial journalist that connects the lessons from the book to events in the history of the stock market, such as the dot-com crash. The original book is a classic, while the commentary already feels dated, but both will make the basics of investing more clear to you.

 

I am amazed this question has come up. Technical analysis in and of itself does not make sense. The only power it has is to identify where other muppets may try and trade the stock so there may be small pockets of resistance which survive until the size players (who are 100% fundamental analysis) drive over them.

If your goal is to pip $300/$400 on a good day, you may be able to play these 'technicals' as nothing more than self fulfilling but anyone who uses them in the realm of professional investing (beyond coming up with arbitrary entry points to build a fundamental position) doesn't deserve to earn the money they are being payed.

I get hit with a good 10 - 15 emails a day from brokers shifting technical levels because they want to get face time with me but have nothing better to write and sometimes these levels are correct, sometimes they are not correct. Sometimes (more often than not) brokers will give 'bands of resistance/support' so they are more likely to be correct but this defeats the whole point.

I have trawled through a tonne of research regarding back testing technical indicators and have never found a detailed, unbiased conclusion that any specific strategy works and if you have 30 different technical indicators to choose from, you can confirm any technical hypothesis by conveniently ignoring the techs that tell you what you don't want to hear.

By looking at volume and price you can sometimes determine where large buyers may be sitting but these buyers may be wrong in the end or may be over-run by even bigger sellers.

If I were you, I would spend my time trawling through company reports and broker research in order to understand a holistic approach to investing and instead of technicals, concentrate on macro indicators.

TL;DR Technicals are god awful

1percentblog.com
 

For those of you bashing technical analysis---I'd love to hear your personal stories as to why it doesn't work. I've seen a number of traders (in the commodities and fx space) who trade on ONLY technicals and consistently beat the market. I've also seen technical traders fail as I have with fundamental traders. My favorite type of trader is the one that rolls out of bed 30 minutes before the bell, listens to his IPOD on the train in the morning, updates his fantasy team pre-open, and then walks into the pit or up to his screen and prints money during the day.

I'm not arguing this is the proper way to prepare for a day in the market but it goes to the point I am trying to make. Trading is 100% about feel and whatever structure or system trader's create to explain their trading strategy or whatever data or charts they use to justify decisions are all part of a general "feel" for the market. Some traders develop feel through fundamentals, others charts, others can walk into a pit and smell the market.

***This does not apply to black box systems or algo-trading

 
CornTrader:
For those of you bashing technical analysis---I'd love to hear your personal stories as to why it doesn't work. I've seen a number of traders (in the commodities and fx space) who trade on ONLY technicals and consistently beat the market. I've also seen technical traders fail as I have with fundamental traders. My favorite type of trader is the one that rolls out of bed 30 minutes before the bell, listens to his IPOD on the train in the morning, updates his fantasy team pre-open, and then walks into the pit or up to his screen and prints money during the day.

I'm not arguing this is the proper way to prepare for a day in the market but it goes to the point I am trying to make. Trading is 100% about feel and whatever structure or system trader's create to explain their trading strategy or whatever data or charts they use to justify decisions are all part of a general "feel" for the market. Some traders develop feel through fundamentals, others charts, others can walk into a pit and smell the market.

***This does not apply to black box systems or algo-trading

You're talking about trading in the pits which isn't solely based on technical trading. You have and know customer orders, resting bids/ offers, speed of execution, different flow not seen by other participants are all things that lead to asynchronous information which can give you an edge.

These 'feel' traders are becoming less and less profitable in general or have already died when expectation finally caught up with them. But trust me I'm not saying that technicals don't provide any value though.

 

@wilder a small part of my experience is based on trading in the pit and your certainly right about the "feel" traders in the pit. Those guys are a dying breed. My point on feel was clouded in my op. Great traders get comfortable with a system whether that be the method redrut suggests or a technical approach and develop feel based on that system. I agree with @redrut that you can't pay attention to 30 charts sent from 10 different analysts. I do believe that if you are trading one particular product and you have a series of charts and indicators that you like to look at---it is possible to develop feel around those indicators and be a succesful trader based solely on technicals.

I am now done arguing this because I don't really care, never used technicals when I did trade, and have since transitioned to a sales desk. I've seen what I've seen Redrut your monkey shit smells like strawberries.

 

Paul Tudor Jones had a good interview where he mentioned how half the money he's made. The other half is from fundamentals. He said how when he was starting out, there was a lot of volatility in the markets and not enough information to make sense of it all. Fundamental analysis wasn't as practical back then and so he said a lot of traders from his generation make money using technicals. Then, when data was available, and finance began to catch the eye of academics, people naturally felt a need to explain what was happening and fundamentals became more and more mainstream. However, there isn't always an explanation and factors are constantly changing, so a lot of fundamental analysis is just junk as well.

There are studies on how fundamental analysis is just as poor as technicals. the market is basically efficient so you really need to know your shit to get anywhere. The recent ER post mentioned how a good chunk of the job is just sales.

 

I think almost all retail people that actively trade, or so they think they classify themselves as traders, are gambling. I'm still of the belief that there is a prominent split b/w FA and TA - I use charts more than fundamentals, but would not classify myself as either.

One point someone made to me a while back is worth considering regarding charting. If everyone uses charts then many times things are self-fulfilling prophesies, so to speak. For example, if there is clearly a down channel on a chart that you can almost guarantee some type of bounce b/c everyone sees it and will act accordingly. Granted, this is a 50,000 foot view of things, but I think you get my point. If everyone believes something will happen then there's a good chance it will if they're all putting on the same trade.

Or, this can all make no sense and I'm talking out of my ass. I'm sure someone will point that out.

 
happypantsmcgee:
Anyone who completely dismisses technical analysis is foolish.

I think you're absolutely right. I think fundamental analysis is much more important and valid for long-only funds, investors and value investors. Most people don't have that time frame and technical analysis is much more useful.

 
happypantsmcgee:
Anyone who completely dismisses technical analysis is foolish.

Not only do I completely dismiss technical analysis. I make fun of those who even consider this alchemic endeavor. I also make fun of those who try to "time" their buy and sells.

 

Technicals matter a great deal for timing, including on fundamental trades unless you have a multi-year time frame. A lot of the biggest macro guys use both. Say you wanted to express a fundamental view on currencies, looking at technical factors before loading up on spot/futures could be the difference between getting stopped out and riding something huge (said the actress to the bishop).

 

oSnap is absolutely right. People who ignore technical analysis need to know that market can remain irrational longer than you can remain solvent. In crude oil trading, I know candlesticks are used very often by traders. At the same time, keep your technical simple...

 

I can't remember who said it, but trading is like being lost in the woods behind your house. Your house has a light on the porch that you can barely make out, but which keeps you on the right track. Those are the fundamentals. Yet you also need a lantern to see what is right in front of you. Those are the technicals. Without either one of them you will spend a lot of time lost in the woods.

 

Technical analysis is nonsense unless there is a fundamental reason underlying the technical. For instance if China is stepping in and buying treasuries everytime yields hit 3%, then there is gonna be a resistence level at 3%. When people start talking about "head and shoulders" patterns and "death crosses" that stuff is nonsense. I personally know of algo traders who manipulate these self-defeating patterns and do it alot faster than you can.

 

Some questions that I like to think about:

Does everyone viewing a chart interpret the technicals the same way? For example Tyrets, many can see a downward trend and some interpretations will be favoring momentum while others will be betting on mean-reversion. Why do you expect a bounce in a downtrend versus further liquidation/shorting pressure?

Just because a price level has increased buying and selling pressure, does that necessarily mean changes in price won't be random?

Technical analysis is a lagging indicator. In what instances does TA lead to a verifiable and quantifiable edge versus all the empirically tested instances in which it does not?

Even if you know there has been buying/selling pressure at a level before (the example above using China buying at 3%), do you know that it will happen again with the same size and that you can take advantage of it before price impacts and HFTs?

 

Ibreitst, those are some really good questions and I hesitate to weigh in as there are others that have more experience than myself but I will say this, there are other kinds of technical analysis beyond charts with Bollinger bands and the like. There are firms that base a huge amount of their analysis on technicals and do very well and there is a certification devoted to the practice so I feel like those two facts, among others, lend some credibility to it, even in the eyes of people like New Yorker.

If I had asked people what they wanted, they would have said faster horses - Henry Ford
 

Both will come into play - depending on time horizon, both are usually used together.

differenct fundamentals for different energy products: NG vs Crude etc.

For energy, Macro events and indicators (payroll #'s, central bank decisions, political disruption) play more into price movements than pure supply/demand numbers (such as doe, api, etc). and currency movements will affect the WTI-Brent spread as well.

When dealing with spreads such as crack spreads - supply/demand indicators and technicals can come into play moreso than macro events.

Also, some traders like different technicals -- I know that candles, and bollinger bands are used by some for crude oil moreso than Fib retracements and the others.

 

Thanks for the input guys I really appreciate it. I go to school in Texas and I'm hoping to get an internship in energy trading next summer.

Are there any resources in particular (books/websites/etc) that would be useful to learn more about becoming a successful energy trader?

 

Also, some traders like different technicals -- I know that candles, and bollinger bands are used by some for crude oil moreso than Fib retracements and the others.

Oh you know this? Really? Please reread what you wrote and realize how stupid it sounds!

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.
 

please explain why you would say that- different traders like different technicals for different products whats wrong with that statement?

why is it so neccesary to be a dousche on here. Either help or don't, make a statement or correct one...it goes to show the true nerds - because if you were in normal social situations with normal people and were condescending like this, someone would open you up.

 

Oh you again...

Because it just sounds ridiculous the way you are saying it as if the norm for energy traders is a certain set of technicals vs another. The real answer is it varies a lot. I am becoming increasingly annoyed with people that spout off like they know everything. I am not even going to pretend i know which technicals an energy trader uses because I dont know.

Unless you work in the area then neither do you.

You do not have thick skin you need to get off wall street asap. You obviously dont work on a desk because if you had you would know the short fuses that traders have and will easily rip into others.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.
 

Anyways...

Back to the topic, @marcellus thanks for the recommendation on the EIA website. I've been reading through that and it's really good. Where can I find Monty's list of books? I looked on his profile and threads but had trouble finding it

 

Electricity Markets: Pricing, Structures and Economics Energy Trading and Investing Liar's Poker Moneyball Monkey Business The King of Oil The New New Thing The Smartest Guys in The Room Trading Commodities and Financial Futures: A Step by Step Guide to Mastering the Markets, 3rd Trading Natural Gas Understanding Today's Electricity Business Understanding Today's Natural Gas Business

pass the SB's now

if anyone is in Houston I could toss you most of these as they are sitting on my shelf

 
Revolution:
Energy trading and Investing blows "Oil 101" out of the water. Although totally different books, Oil 101 is way too much in-depth

agreed. '"oil 101" is great if you want to get acquainted with oil markets and gain a solid foundation for understanding up-/mid-/dowstream developments. but, unless you're trading wet barrels, some of the chapters may not be all that helpful (i.e. make you a better trader).

 

http://www.amazon.com/Traders-First-Book-Commodities-Introduction/dp/01…

So far, I think it gives a decent overview of futures and the commodities market, in general; however, my background is in equity research (with a focus on ag and metals) so I have zero trading experience. For me so far this is a perfect primer: it's easy to read, very dumbed down, and the breadth is wide. It's exactly what I wanted so that I could get a better grasp on the markets that so largely affect the equities I cover.

Amazon reviews are largely positive and it costs $3 for the Kindle copy.

Considering I may want to go into commodities trading in the future I feel this book is giving me a sense of the risks of doing so (the author is very honest about the pitfalls of commodities).

 

Trading Commodities and Financial Futures: A Step by Step Guide to Mastering the Markets, 3rd

How is that book for someone about to enter commodities trading? I want to learn the basics of the mechanics of commodities futures and maybe some fundamental aspects as well but across commodity classes not just oil and natural gas.

 
seabird:
http://markets.ft.com/screener/predefinedscreens.asp

Also check out the magic formula investing method of Greenblatt. Ranking of companies by earnings yield and return on invested capital.

These look like screens for finding stocks. I was referring more of technical analysis to try to time the entry/addition/trim/exit of stocks within a portfolio. Specifically, a lot of time my PMs will ask when I recommend buying or selling shares and I usually answer with fundamentals. I'm trying to increase my technical skills to complement my fundamental analysis skills.

 

In that case, you should look in to the magic formula investing method specifically. He discussed in his book "the little book that beats the market" the timing for entering positions, and when to exit (he doesnt hold for more than a year, and recommends a rotating selection of stocks based off of his criteria) and given that his method is quantitative, it should be relevant. Also, in general, the value investors would recommend getting in to a stock when its 30-50% below what they consider to be "intrinsic value" or whatever.

“...all truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” - Schopenhauer
 
seabird:
In that case, you should look in to the magic formula investing method specifically. He discussed in his book "the little book that beats the market" the timing for entering positions, and when to exit (he doesnt hold for more than a year, and recommends a rotating selection of stocks based off of his criteria) and given that his method is quantitative, it should be relevant. Also, in general, the value investors would recommend getting in to a stock when its 30-50% below what they consider to be "intrinsic value" or whatever.
aren't the two ratios used in the magic formula EBIT / net working capital + net tangible assets, and EBIT / EV to determine rankings?
 

MACD confirmation, stochastics, RSI, ATR

Disclaimer for the Kids: Any forward-looking statements are solely for informational purposes and cannot be taken as investment advice. Consult your moms before deciding where to invest.
 

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