Fundamental vs Technical Analysis

Which one should I follow? This is a common question that everyone asking. Fundamental supporter will say that value investing is the best. Technical analysis folk will say fundamental does not works at all!

To me, both set of theory and concept has pros and cons. It largely depend your investment time horizon, your risk appetite, your investment capital & lastly, you required rate of return.

What is value investing? The concept of value investing is to invest in a good business at correct price and hold it for long term, as long as the business fundamental is intact, regardless of market price movement. Warren Buffett once says that “In short term, stock market is like a voting machine; in long term, it is like a weighting machine”. The real meaning behind this is that the stock price in the end will reflect the business earning.

What is Technical Analysis? Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

I am a value investing supporter. However, due to my curiosity on technical analysis and trading, I had learned Japanese Candlestick & various technical indicators. In order to prove that all this technical theory can be work, I have tried it out on stock market and derivatives. The result that I get wasn’t great, partly due to my risk averse nature and also I am not yet master the tools yet.

The result is not really important to me, as I discover other things when I do some analysis over my trading result. There are few very interesting conclusions that I can make through my finding.

For instance, if you have $100 million capital on hand, you can’t really speculate with that kind of money at stock market. First of all, the buying price will work against you. It is very difficult to get low favorable price with huge buying volume without bidding up the price. Second, when you want to sell, the price will work against you again!

Technical analysis is a mimicking of investor psychology in the market. Japanese candlestick is best at explaining this. There are a few reasons why some of the so-called reverse signal work is because all of the traders learn the same things, use the same tools and come out with same conclusion!

The next best thing about trader is that they feed on news blatantly! This recent sucker rally is best at demonstrate how the trader push up the market. I can’t see anything difference between 1 month ago and now. The only thing I see is things going get ugly at 2nd half of the year. Whether it is a bottom, I am not sure as it is out of the topic.

To be continued…..