Fundamental Analysis, Technical Analysis and Successful Traders

There's been a lot of discussion about:

  • the pros and cons of Fundamental Analysis and Technical Analysis and on whether or not they can both be used to successfully trade.
  • whether people are manipulating the market by "drip trading".
  • whether the UK market subservient to the US market.
  • etc...

It got me thinking...

Does any of this matter, and, more importantly, what is it that makes a successful trader?

To me there are just 2 things to consider:

1. find a system that makes more money than it loses.
2. religiously stick to that system.

This, to me, means, you can be a Fundamental Analysis advocate, and if your Fundamental Analysis backtesting (mmmm.... do people who advocate Fundamental Analysis actually backtest to validate their hypotheses, I wonder???) makes you money then all you have to do is religiously stick to your rules and you will be successful.

Same goes for Technical Analysis.

The same could be said for any system that makes you money.

If your backtesting suggests that going long on Mondays makes you money then do it every Monday.

If backtesting indicates going short every time there is a full moon will make you money, then you should go short every time there is a full moon.

Who cares why you are making money. You are making money and that's all that matters!!!

If the system consists of a clearly defined set of rules, then (assuming that one is honest with oneself) it should be readily provable whether any shortcoming in one's trading is due to flaws in the system itself (point 1) or one's implementation (point 2). Psychology is related only to the second point. Provided that one follows the rules religiously (however easy or difficult that might be), then psychology is removed from the equation.

Of course the characteristics of the market do change with time and your system may no longer be profitable, then Point 1 above will no longer be valid and you would need to find another system.

In my mind, we are deluding ourselves when we try to suggest trading the markets is some sophisticated science. We are not splitting the atom or finding a cure for cancer, all we're doing is trying to make more money than we lose.

So many people say I failed or I succeeded. They personalize a trade. Surely when someone is making a trade be it successful or unsuccessful it should be the trade and not the person who was un/successful.

Now going back to Technical Analysis versus Fundamental Analysis. First let's define both of these schools of stock analysis. To me Technical Analysis is pure charting, nothing else...volume, indicators, chart patterns. End of story. Everything else is Fundamental Analysis. In a pure technical sense we shouldn't look at the notices or listen to any economic data or know if it is a presidential election year.....nothing but the chart.

This of course is not reasonable, sensible or probably even possible unless you lock yourself away from all outside influences.

From my perspective, I hold very little store in Annual Reports. First is because they are boring to me and I can't get excited by numbers. The second reason is I always have some skepticism about their veracity. I do like to know who the top 20 holders are, I like to know who the directors are and their experience and I like to know what the business actually does.

I also like to know how long the business has been running and what its debt levels are like. I feel the basics of a company's P/E ratio goes part of the way to telling what the market may feel about the company's prospects. Dividend dates, reporting dates. It is good to know the external conditions which may affect the success of the company. It is also good to know what has caused a company's price to increase or decrease dramatically in the past. This information can offer confirmation and reason when there is an alteration to the price level of a stock.

With as much possible information about a given stock, one is more likely to make a successful trade.

When Technical Analysis is brought into the equation, this ties the whole thing together. It would be almost impossible to make a bad investment these days using both TA and FA proficiently and in combination.

Having said all of that, I am taking my view from the longer term perspective where I would be more likely to stay in a trade on a larger retrace than would a short term trader.

If my trading style were simply a few days riding patterns, then I would have no interest in Fundamental Analysis at all, including not looking at the notices.

I have a joy of the markets and love to find out all I possibly can about a given company which interests me. I just love doing it. I do it for the sake of it, the money is secondary to me, in fact the money plays a very small part in the equation. Once I have done 'the business' as I call it, on a company I can understand each major chart movement and what influences it. I can trade with absolutely no fear whatsoever.

I will grant you, it is a lot of work and not for everyone. Like everything you do, you have to start off on a basis of loving what you do. Because this is such a lot of work, I like to share my finds with others to save them the effort and with the hope they will benefit.

What makes a successful trader? A system with a convincingly and significantly positive edge, proper risk management, psychological detachment, discipline in sticking to one's plan, and - during one's apprenticeship years - perseverance and some luck. And (of course) a very understanding and supportive spouse :P.

I also like Gil Blake's basic steps to becoming a successful trader;

1. Select time frames, markets and strategies that suit your personality.
2. Identify non-random price behaviour, but recognise that markets are random most of the time.
3. Absolutely convince yourself that what you have found is statistically valid.
4. Set up trading rules.
5. Follow the rules.

Recommend this on Google

The content of this site is copyright 2016 Financial Spread Betting Ltd. Please contact us if you wish to reproduce any of it.