An Unbiased Opinion on Technical Analysis and Fundamental Analysis
I took an interest in the stock market awhile back and have always seen much controversy over TA and FA. I personally have used FA in the past and have found decent success with it, I haven't been returning 30% every year like Peter Lynch but I have made decent money over the years. I use FA, but because there has been so much controversy over TA I have looked into it, and even used it in market simulators in the past. I'm going to share with you guys what I have found using both of these methods trying to avoid biases towards either one.
Explaining Both Methods
Technical analysis uses chart patterns and indicators that try to predict the direction a stock might be heading in the future. TA is usually a swing trading 2-8 days) or short-term trade (2-6 weeks). TA also assumes supply and demand, liquidity or volatility, and a somewhat valued price. Fundamental Analysis tries to predict the direction of a stock based on financial statistics of the company. These are usually long-term trades or investments.
Do They Both Work
Yes I believe both methods work. Financial statistics of a company are very closely related to the price of a stock. When a company produces good earnings and revenues the price of the stock will go up. Momentum does exist in the stock market making patterns and indicators that read momentum an accurate way to predict short-term price movement.
Which is Better
FA is better for bigger accounts and risk avoiders. TA is better for smaller accounts and risk takers. The reason for this is because TA is a quicker more riskier way to make money while FA is a slower less riskier way to make money. This is due to the volatility of stocks in TA. Big accounts under high risk will probably make the owner shit his pants even if they are making good money at the moment. Small accounts under high risk isn't too bad cause it won't be the death of you if you lose everything, especially if you're pumping brass. Under thriving markets like the one we are in right now TA is probably a better choice because it is less likely you will have losing trades and volatility of stocks in TA makes for big wining trades. Under average or poor markets FA is a better choice because volatility in TA makes for big losses in losing trades while losses in FA will likely follow the market.
Many people argue that there are not many if any successful technical analysts that the average joe has ever heard of while there are billionaires that use FA like Warren Buffet. I do not believe that this is automatic proof that it does not work or have significant value. Like I said earlier TA trades in liquid and volatile stocks, these stocks are usually very small meaning you can't put that much money into them without changing the price dramatically. This makes it very hard for wealthy people to use TA and produce and exponential return. Even if someone used TA and was very successful, once they get up into 10-20 million range they will likely move over to fundamental analysis where there are many more stocks to choose from due to the redundant need for volatility. Another reason a successful technical analysts probably won't be known to everyone is because they use systems. A TA system is system the someone can make that will use TA indicators and tell you exactly when to enter and exit a trade based on those indicators. Once these systems are made they are so straight forward many people have programs and robots that trade for them using the system. Now, if somebody created a system that straight up printed money they probably wouldn't want anyone getting their hands on it because it would be so easy to use anyone could do it. Too many people using the same system will bring down the effectiveness of it, so good technical analysts are probably very secretive about their work.
Why do People Say One or The Other Does Not Work
People who say one or the other does not work either have not tried the other or have but did not do it correctly. I have seen many articles saying TA does not work or FA does not work but they don't even know what it is or how people trade using it.
FA and TA both work and as long as you understand the concept you be successful with either one.
- FA is better for wealthier people with bigger accounts.
- TA is better for smaller accounts.
- TA will work very poorly under bad markets.