Fundamental analysis. Technical analysis.
The debate that can rage between two traders on whether fundamental analysis trumps technical analysis can be entertaining. You will see them hold tight to their opinions and you have to applaud their passion.
At Netpicks, we understand the basic fundamentals of what we are trading but when actually trading the instrument, we follow the technical aspects of the market.
You could find 10 different opinions for where the economy is going next. You would hear from experts who convince you with ease of one direction, only to listen to someone else and feel entirely different. Recession. Depression. Coming economic boom.
A perfect example of this is the stock market. People have been predicting the crash for a few years now even though we are continually making new highs.
You know people have been trying to short this chart but this monthly chart shows that regardless of any fundamental pontificating, on a technical basis, this chart is bullish.
On a technical level, the last few months is showing a lack of conviction but to think you are going to pick the top is a fools game.
Ignore The Talking Heads
Turn on the financial networks and you can hear on an almost daily basis someone making their case for a crash. They will talk geo-political factors and insert other variables and buzzwords attempting to show the pending supply demand imbalance but in the end, traders drive the markets.
Regardless of the fundamental analysis they dazzle you with, other traders, those that move the markets, have to buy into the talking points.
You basically get lucky when it comes to trying to do real fundamental analysis. Let’s face it, educated guess is probably the best anyone can do. Even if the economic outlook shows a strong imbalance in one direction through fundamental analysis, price does not always have follow suit on a technical level
I admit, I am not smart enough to dissect every aspect of what makes up fundamental analysis but in the end, what makes money is price movement. There can be many reasons why price is making the move that it is but all I care about is how it’s moving.
- Is it making new highs and lows or lower highs and lows?
- It it forming a consolidation pattern I can recognize?
- Is price moving with momentum or is it moving like a snail?
Answers to those types of questions can be enough to make money with.
We Trust Technical Analysis
“In Charts We Trust” is the mantra around NetPicks. Why?
Rather than delude ourselves that we can analyze thousands of global fundamental data points, or analyze thousands of lines of financial statements from a company and come up with a trading plan we’d rather let the trading chart do the talking.
And charts do talk.
Boiling it down to numbers and a graph. All those thousands of data points cause the chart dance to happen and personally, that’s much simpler to assess. A two dimensional charts boils down all those facts, rumors, figures, opinions both macro and micro to one two dimensional chart.
Technical analysis involves the belief that all knowable factors that affect price are already built into the current price. Yes there are events like Hurricane Harvey that can cause havoc in the markets but overall, technical analysis as opposed to fundamental analysis, assumes price discounts everything – Dow theory.
I will say that one of the biggest knocks against technical analysis is that there is subjectivity to it.
Another knock from the detractors is that technical analysis is a “self fulfilling prophecy”
Do you see the contradiction when combining those two statements?
We believe in the words of Martin Pring: “They are a reflection of the trend in the hopes, fears, knowledge, optimism, and greed of market participants. The sum of total of these emotions is expressed in the price level, which is, as Garfield Drew noted, “never what they (i.e. stocks) are worth, but what people think they are worth”.
The traders at Netpicks believe it is much simpler to see the emotions on the chart than it is to dissect and then reassemble all the fundamental data to come up with a trade-able analysis.
Technical Analysis Can Be Wrong
Regardless of how good you are at trading the chart, you will never get a 100% clear picture as your understanding is limited by your experience. Yes, you will be wrong.
But, with the right set of rules, indicators and trade plans you can absolutely put the odds in your favor. Where fundamental analysis could be a 50/50 bet at most with proper technical analysis it’s not uncommon to push the edge to 60%, 65% or even 70%.
Fundamental analysis may give you an idea of what could happen, technical analysis will not only give you an idea, but also where something can happen. Information is great but not knowing how to apply it makes it useless.
The trading strategies designed at Netpicks look to analyse the market and then give you entries, exits, and even trailing stops. Our trading strategies are based around technical analysis because they avoid:
- Analysis paralysis as you seek to implement the 100 fundamental factors you just analysed.
- Guessing where to enter your trades and get out for profits or a small loss because trading with emotions is not a professional trading approach
- Using an incomplete trading strategy as every aspect is tested and made into a complete trading plan
If you were to approach trading from a fundamental analysis standpoint, you’d probably never get a trade as the market is not conforming to your fundamental outlook.
Just Follow The Trading Strategy
A technical analysis approach can be something you can learn but even then, there is still the chance you missed something that may alter the plan completely. Unless you understand virtually all aspects of technical analysis, that is something you will have to live with.
The following chart is an example of one of our trading strategies. I have highlighted the entries that were determined by the trading strategies with a red box. You didn’t need to analyse the chart to see them.
There is a technical aspect to these setups as well and let’s see if you caught them:
- This is a double top formation that is regarded as a reversal pattern once confirmed with a break of the valley between the two tops
- I have added a green line to the valley (support) and price has broken the valley which confirms a true double top reversal pattern
- Price is basing under the green line which was once support and acting as resistance. This is a bearish chart formation
The trade entries, without you even needing a clue about technical analysis, set you up with a great day trade that made more money than some people make in a week.
Remember though, technical analysis can still be wrong which means our trading strategy can be “wrong”. Since losses are a part of trading, is it really wrong or just a function of the random distribution of wins and losses?
Are You A Trader Or Analysis?
We are traders looking to make money from the instruments we are trading. Analyzing markets can be a full time job and perhaps get you a job at CNBC but it won’t make you money.
Getting your hands dirty and understanding the price movement and then taking advantage of them is where you make your money. That is what we do every single day in our trade room and in our Inner Circle – make money and teach others how to do it.
Come into our trading room and see that trading can be simple (it is not easy) and that making money without understanding any fundamental aspect is something that you will be able to do.