Technical V.S Fundamental Trading

Date Tuesday, September 30th, 2008

Technical trading is one of the most widely criticized forms of investment. While the majority of the criticism comes from fundamental analysts – like Warren Buffet who said “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer” and “If past history was all there was… the richest people would be librarians.”

There are two major flaws to technical analysis:

The first is simply that tech traders are what are also referred to as intra-day or day traders. Many day traders make upwards of 500 in and out transactions in a single day of trading. With per-trade fees running in at about $.30 for in-and-out buy or sell orders, that’s $150.00 per day just in fees, not to mention charting software and all the other tools (some traders pay over $1500.00 per month for screening programs).

In order to be a profitable tech trader, one has to make sure that their trades are at least marginally profitable the entire time lest they slowly dig a whole for themselves.

The second major flaw is that tech analysis as a standalone uses chart-only indicators of trend movements and support/resistance points for intra-day trading. With the thousands of computers trading algorithmically now, there are many stocks where tech analysis can accurately predict momentum movements based on buy-and-sell volume created by computers trading stocks based on mathematical equations.

However what tech analysis lacks is the factoring-in of an extremely volatile influencer of stock price: Human Emotion. For example, it is statistically proven that just under 80% of the time an original AFL team wins the superbowl, the Dow posts gains over 10% ( Why? Call it patriotism and a bevy of football fans at the broker desks.

The market is growing ever-sensitive to economic data announcements (For example the S&P 500 drop today simply based on the minutes of the Federal Reserve Meeting.) A tech situation can look absolutely perfect, but an oil number can post huge price gains and tank the stock when a trader is going long on it. To be a successful tech junkie, a trader needs to factor these things in. When an oil number is coming out and the odds are good that it’ll be significantly higher, play a few oil stocks that look good on the tech analysis side. It’s a safer way to marginalize risk.

Fundamental analysis has proven the strongest over the long-term course of things. The S&P500 has posted just over 10.5% gains annually since its inception on March 4, 1957. An initial investment of 10,000.00 would be worth almost $1,000,000.00 today. Other success stories like Warren Buffet’s Berkshire Hathaway follow fundamental analysis to discover discounted value stocks. Every $10,000.00 initially invested in Berkshire Hathaway would be worth around $30,000,000.00 today!

So which is the best way to go about things? Since tech analysis is the riskier of the two, and requires a much more hands-on approach, it is only useful to someone who has time and money to invest. The average intra-day trader doesn’t become profitable until 12 months after they make their first trade, and that’s if they do it an average of 30+ hours per week.

I am both a day trader for a proprietary firm, and a “hobby” stock investor. Day trading tech analysis takes a lot of experience and gut feel. There are successful day traders but they generally don’t have an easy time getting there.

A better bet for the average person is to find companies that pay decent dividends to re-invest, have strong earnings and an established market, but still have room for expansion. The buy and hold method is tried and true for over 80 years (72% of stocks increased in value from Jan 1 to December 31 last year).

by D. Blain

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