technical analysis
Financial Markets, Technical Analysis

Is Technical Analysis Superior To Fundamental?

Is Technical Analysis a Superior form of analysis compared to Fundamental?

Today I want to talk about one topic that I feel a strong passion. The topic discussed is controversial (I like controversial). 

One of the most significant discussions in the finance industry has always been about whether the underlying security or price patterns are better prediction tools of future price movement in the financial markets. 

The critical aspect to understand when it comes to this “fight” between fundamental and technical, is that technical traders DO NOT BELIEVE fundamental investors are wrong. Technical traders just believe all the fundamental information is already drawn in the price, in the charts, by supply and demand, this is the main reason why most technical traders don’t even look at the news.

In today’s markets, technical analysis realizes that is you place orders in the market without knowing where to enter and where to leave, the profits made in years can be destroyed in days or weeks.

 

What Is In the Mind of Investors Who Believe In The Fundamentals?

Investors who focused their decisions in the markets based on the fundamentals, they backed their investment decisions based on three main factors: 

a) The underlying economics of the Core Business.

b)The underlying economics of the industry where the business operates.

c) The economy as a whole, macroeconomics. 

Investors who make their investment decisions only on the fundamentals tend to invest in the long-term.

They based their financial decisions on factors that don’t change overnight, so their time-frame is longer.

It is tough to find any fundamental investors who would buy a stock such as Google, who would want to sell it by the end of the week. This kind of investor, if they buy something, is for holding it for an extended period.

Before taking any investment decisions, sophisticated fundamental investors study first some aspect of the security they invest in, such as:

a) Earning reports. 

b) Company’s balance sheet.

c) Background of the company’s management team. 

d) Financial Analysis from the Industry.

e) Macroeconomics and Governments policies.

 

In today’s markets, technical analysis realizes that is you place orders in the market without knowing where to enter and where to leave, the profits made in years can be destroyed in days or weeks.

technical analysis

 

What Is In the Mind of Traders Who Believe In The Technicals? 

The mindset of a technician or a trader who believes in technical analysis as the primary mechanism to buy and sell securities, based their decisions on three main assumptions:

1) The market price is a total reflection of all forces in the market; this includes all economics and fundamental data. 

2) The market price never moves randomly. Prices move in trends and are repetitive. Because of this, the market price can sometimes be predictable. 

3) Human emotions and human behaviors are a significant driving force in prices, and these types of patterns are reflected in market charts. Because human emotions and behaviors rarely change over time, sometimes these patterns can be accurately predicted. 

 

Technical Analysis Has Fewer Risks Than Fundamentals

Let me try to explain this to you by mentioning three examples:

1) Internet companies in the ’90s: many companies went from zero dollars to hundreds of dollars. These market prices were achieved without any fundamental data, such as earning reports of earnings forecasts.

In the ’90s through Internet companies, no fundamentals could justify the market prices; they could never predict such price surge. However, traders or technicians had a big game to play in. They could know where to enter the market and when to leave, so when investors were holding their positions, technical traders were making a fortune. 

2) The beginning of Chinese companies entering the US Market: many of you might know what happened during many years with Chinese companies coming to Wall Street. Most of them were faking their core business; they were scamming investors who believed in their fundamentals, earning reports, balance sheets, management team, cheating their information with domestic consulting companies linked to international franchises, etc. During many years, traders or technicians, especially short-sellers, made a fortune shorting these Chinese companies. However, there were a large number of professional investors and retail investors who lost most of their wealth with these scams, only because their investments were based on the fundamentals

3) Cryptocurrency Hype of 2017/2018: If you were in the crypto market by that time, you could see and experience some of the quickest and most significant returns ever seen in the financial industry. 

Crypto prices hype were based on some necessary information that companies gave to the public: ICO funding, collaborations with governments and big companies, strong management team, logistics, technology, price predictions, strong social media marketing, mass media news, etc. 

The majority of investors who based their decisions on the fundamentals believing in those projects, lost their wealth in a matter of a few months.

On the other hand, those experience technical traders made a fortune during the hype. Also, they did not only don’t lose capital at the beginning of the correction, but they made a fortune during the biggest decline.

 

Companies Can Lie About Fundamentals, But Charts Never Lie.

Companies can lie about results, earning reports, earning predictions. They can lie about any information based on the fundamentals. There is no way to know 100% that the information given is accurate. Also, Mass Media can lie too, in most cases, based on conflict of interests.

Remember one thing: the market is not a win-win game; it is a zero-win game: for you to win and profit in the market, someone else must lose. 

When you based your investing strategy in technical analysis, the information that you see in front of you is called “reality.” Charts never lie.

What you see in the charts is the only reality that matters because the prices are the reflection of all the information discounted, including the fundamentals.

 

Why Do I personally Believe Technical Analysis Is Superior?

To answer this question, I must give a quick summary of the history of the market:

1) Many years ago, and decades ago, the leading and most prominent companies in the market were industrial companies. These types of companies required significant initial investments, big infrastructure. It was impossible to build a competitor of Ford in a short period because it took a massive amount of resources and logistics.

2) In the current market (for some years already), the most prominent companies are related to high-tech, software, computer, and tech devices companies. These types of companies change incredibly fast in a short period. Anyone around the world, no matter their background and education, with one good idea, creativity, and work can create a project that could become a dangerous competitor to the most prominent company, this is why it is not rare to observe many acquisitions from considerable companies to some of these “garage” projects. Also, you can often observe some bankruptcies in a matter of days of companies that had “good fundamentals”, and its investors losing all their investments overnight. This kind of situation was almost impossible years and decades ago; however in today’s markets is not rare.

 

In my personal opinion and experience, if you know about fundamentals is excellent complementary information to add to your technicals; the more information to use, the better. 

In the modern era of the financial markets, it is easier to predict what is going to happen tomorrow or next week than to know what is going to have in the next three years. It is almost impossible to know what is going to happen in the long-term in this fast-growing environment. That is why technical analysis can be more useful and practical when it comes to “play” the markets.

One one hand, a technical Trader, always knows when to enter a position, when he exists the trading position if he profits, and knows how much is going to lose if he is wrong in the market. 

For the technical trader, losing is part of the game. They know that trading the markets is a probabilities game, and they have to have a proven system and strategy that matches their personality for them to win in the markets.

If a technical trader wants to place a long position, they have to make a more extended time-frame analysis. 

They are buying for the long-term, but they are still trading because they know when they are going to sell the position, and if the market doesn’t go the way they expected, they admit their error and assume the losing position.

 

One the other hand, fundamental investors invest their money in the long-term. They hold their market position until some changes happen in the fundamentals based on their initial investment. Here comes a big question, and a big problem for a fundamental investor to answer:

a) When is the perfect time for fundamental investors to enter a long position in the market?

b) When is the time for exiting the market and taking profits? 

c) When is the moment a fundamental investor recognizes the investment mistake, take loses, and carry on to the next investment opportunity? 

technical analysis

If you ever experienced to ask these questions to any fundamentalists, their answers usually are random, random numbers that seem more like a dream created than reality. Typically, this type of investor is the same ones who believe that it is impossible to beat the market, like if the market would be a place to overcome instead of benefit from it, and take profits in each opportunity.

 

Conclusion

I used to believe in the fundamentals, but my experience in the markets change my whole perspective.

I realized that you could invest in a “bad” asset, inadequate security, or bad company, and having an incredible ROI.

On the other hand, you could invest in “good’ assets, security, or company, and you could have significant losses or fatal losses (Remember Enron, for instance).

I believe in technical analysis. I also believe in the fundamentals as given more in-depth information about the asset you are investing in, of course. However, when it comes to the final decision of placing an order in the market, the last decision comes from the charts, always. 

Many people get confused by thinking technical analysis is only for short-term traders, which is a misunderstanding. When you trade, you can buy in seconds, in minutes, in hours, in days, in weeks, in months, even in years. This is the beauty of technical analysis. You have more control over the capital you put in the market. 

To sum up, you can also realize that all fundamental information is already reflected in the charts’ market price before the data comes to the public and is reported to the media.

The critical aspect to understand when it comes to this “fight” between fundamental and technical, is that technical analysis traders DO NOT BELIEVE fundamental investors are wrong. Technical traders just believe all the fundamental information is already drawn in the price, in the charts, by supply and demand, this is the main reason why most technical traders don’t even look at the news.

If you liked this article, please check out a previous article about some basics of technical analysis: What is Technical Analysis?

 

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