Fundamental vs Technical analysis
There is only one thing that is certain in the market. And it is that NOTHING is certain. Whether you chose a technical or a fundamental approach, you will not win every time.
People who believe otherwise are “certain” to lose all their chips sooner or later.
So what is this game about? It’s literally true that successful trading is about assessing probabilities, not certainties.
This game is about finding an edge so that the odds are in your favor. This is exactly how casinos make their money. They ain’t gonna win every single time, but over the long term they let the law of large number play out and they do win.
So what does it have to do with Technicals vs Fundamentals analysis? Well, they’re both designed to put the odds on your side.
Technical analysis puts the odds in your favor by assuming past price behavior is likely to repeat in the future.
Fundamental analysis puts the odds in your favor by assuming that an undervalued and/or growing company’s stock price is more likely to appreciate over time.
We could go on about the usual strengths and weaknesses debate, but the truth is that you shouldn’t give a damn about it. The goal is to make money, not to be stubbornly right
Know your enemy
“Know Your Enemy and Know Yourself and You Can Fight a Hundred Battles Without Disaster” – Sun Tzu
Most trader choose their method very early on, and don’t bother learning other styles.
You may know that stock trading is zero-sum game where for someone to win, someone else has to lose. It is war out there.
You are fighting against millions of traders, investors and even algorithms trying to take your money.
The “Know Yourself” in Sun Tzu’s quote is a very long subject that we’ll talk about in great details in future posts.
But the “Know Your Enemy” is a concept that is foreign to most traders. However, by knowing your enemy’s strategy, you can increase tremendously your odds of success.
There are many different strategies out there, some based on technical analysis, some on fundamental analysis, and some on both. I studied several of them:
– value investing (Graham margin of safety, PE models, DCF valuation, …)
– growth investing (Buffett, Lynch, O’Neil…)
– technical trading (candlesticks, moving averages, RSI, MACD, chart patterns, overbought/oversold indicators, volume, volatility indicators, Fibonacci Retracements, Ichimoku Cloud, point & figure, …)
– day trading
– momentum trading
Then, based on my knowledge of all these different strategies and styles, I went on to study the biggest winners over the last 50 years or so, the stocks that doubled, tripled or more in a relatively short period of time (between 1 and 24 months).
Indeed, I’m a big believer of the legendary trader Jesse Livermore’s philosophy:
“It is the big swing that makes the big money for you” – Jesse Livermore
I simply do not care about intra-day daily fluctuations which in my opinion is very much like picking up nickels in front of a steamroller. It’s just not viable long term, just like most studies suggest.
My reasoning was quite simple, yet powerful: Only when I find a great opportunity most of my foes are very likely to become very interested in, should I get off my bench and load the boat as this is when my probabilities of success are the highest. (Note: the “load the boat” concept is something that goes against EVERY books you read on the subject of trading. Remember that what everybody does is not worth doing. More on that in future posts).
Knowing what all my enemies look for and the having studied the biggest winners, I developed my own strategy which is a mix of technical and fundamental criteria. This is my setup, and I have only one. My high probability setup which I call the EGM setup (Explosive Growth Momentum).
The EGM setup – I focus exclusively on:
– companies that have just started experiencing an unexpected explosive growth phase thanks to a new product or a new service (this is what growth investors are looking for)
– because of the new mind-blowing level of earnings and a healthy balance sheet, the company has suddenly become undervalued (likely to interest value investors)
– the stock breaks out on huge volume of a very long and boring base (attracts technical traders, breakout traders, day traders…)
– analysts have no choice but to upgrade (or start covering) the stock and increase their price target, causing the stock follow through right away (attracts momo traders, trend followers and funds)
What you should focus on
The point is that the Fundamental vs Technical analysis debate is absolutely pointless. Instead, you should focus exclusively on finding the few criteria in both worlds that will really put you in very high probability situation, where the chances that your enemies will bid the price up right after you bought the stock are the highest. You’re in this game for one reason and one reason only: to make money!
And of course, as in any high probability situation, you always have to protect your downside (with a stop loss). Even if you are magically right 70% of the time (which believe me, doesn’t exist over the long term), you’ll still be wrong 30% of time. As I said earlier, there is only one thing that is certain in the market. And it is that NOTHING is certain.