Most people like to compare between the fundamental and technical analysis, which is better? Which is more effective to get you profits from the market?
Some of you may know that I have been interviewing local traders who trade for a living. Through these interviews, I was able to draw some conclusions from various traders, which could help to address questions like this. For this post, I particularly want to tribute it to Yeo Kiong Hee, Patrick Lee (aka Fat88trader), Conrad Alvin Lim and Clarence Chee for their sharing.
Kiong Hee is a forex trader who currently teach at Adam Khoo Learning Technologies Group (AKLTG). Comparing fundamental and technical analysis, he simply said, “there are people who only use fundamental analysis and are very profitable, likewise there are people who use technical analysis and are profitable. There are people who use a mixture of both and are also very profitable. On the other hand, there are people who use technical and they lose. They use fundamental, they also lose. Use both, they also lose. My point is that the tools you use is not as important as how you use them. It is how you use them that give you an edge in the market.” This addresses the crux of the problem when asking that question. Do not ask which is better but ask whether the tools that you use really give you a higher change of profiting in the market over a long period of time.
Patrick was a SIMEX floor trader in his earlier days, and now he has successfully converted to trade profitably off the floor (you would be surprised how many of them could not make the transition). Now, he mainly trades SIMSCI (the MSCI Singapore Index that tracks more stocks than our beloved STI) futures. He is a super short term trader, or a scalper as he calls it. He can make a few hundred times in one single day. As such, he said, “Basically for scalpers like us, because we trade so many contracts a day, we don’t have the time to do it. It is so fast when the market moves, and you practically don’t have enough time. Our focus is on the price. For short term traders like us, fundamental is not much of a use. To be actually being objective, I come in without any fundamental ideas of whether the market should go up or down. I just look at the chart to tell me whether I should buy or to sell.”
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Clarence is a forex trader and trainer with T3B. He said, “in the past I often ignore fundamentals, We always say based on charts, that’s technical. Nowadays, I realised that technical itself is not good enough because my trading style is more of swing trades. Swing trades last for few days and even weeks. In order to make sure the trend is sustainable, it is better to do some fundamental research first, to show that fundamentals are able to support the trend then before we enter.”
Conrad is a trader and trainer with AKLTG. He also does swing trades and when asked if he uses fundamental analysis, he said, “I do, I do. And because I am trading the same securities ever so often, the fundamentals don’t change that much. Because as I am trading them, I am actually in the business and I am watching the fundamentals evolve. So I really don’t need to like always have to qualify that stock, and I am in there constantly, I am monitoring the changes, so qualifications are already done, which is why I like trading the same stocks over and over again.” What he is saying is that he would use fundamental analysis to find good stocks and continue to trade this group of stocks using technical analysis.
And not forget about Dennis Ng, my trusted teacher said, “fundamental analysis is one eye and technical analysis is like another eye. Why do you want to look at the world with only one eye? Use both!” Dennis is an investor and not a trader, and hence he is not featured in the interviews. Nonetheless, I would love to do a series of interviews for investors.
Now let’s shift our attention to somewhere further but someone very famous, Warren Buffett. We all know that he is a buy and hold investor. He actually buy businesses and own them forever. He don’t believe in selling a business that is a golden goose that continues to deliver golden eggs. Fundamental analysis is his primary tool to evaluate the health of a business. At his time frame, he does not need technical analysis at all, and that is why he is not interested in charts at all. He even say that the market can close for 10 years and he do not care.
The bottom line is that you can use either fundamental or technical, as long as it gives you an edge. But in general, I notice a relationship between the tools used and the trading/investing time frame, not sure if you did.
In a previous post, I have classified 4 trading/investment time frames, 1) intraday, 2) swing, 3) cycle, and 4) buy-and-hold. You can revisit the post for my definitions. Next, you can look at the diagram below and see if you understand what I am trying to say:
Don’t focus on the fundamental and technical analysis part, and not the rest. The shorter the time frame, the more you would use technical analysis, the longer the time frame, the more you would use fundamental analysis. The extreme cases are intraday trading where you purely use technical analysis and on the other end which is buy-&-hold, you use fundamental analysis. Anything in between, you should be using both. This is just a generalisation as I believe there are some people who use only use either fundamental or technical alone and achieve profitable results.
This is what I gathered from the interviews that I have done. I had tapped the knowledge and experience from these traders. Are you interested to read if these interviews are captured in a book? Would it help you understand trading better? Would it also help you become a better trader?