Which Is Better: Technical or Fundamental Analysis?

12/31/2012 6:00 am EST

Focus: STRATEGIES

Brian Shannon, CMT

President, AlphaTrends.net

In the debate over which method is better to use in making trading decisions, Brian Shannon says that a little bit of both actually works better.

I’m here with Brian Shannon.  The debate is raging now and it will never stop.  The debate is – Is it technical or fundamental analysis that makes a successful trader?  Brian, what do you think?

Well for me personally, most of my decisions are technical analysis.  I think that technical analysis is going to get the timing aspect of it correct.  Technical analysis brings us the ideas and allows us to come up with the risk:reward ratio.  You can also come to ideas through fundamental analysis, of course, as well.  There is a lot more work in it I think. I’d rather look at the pictures than read the articles. 

You know, a lot of people misuse technical analysis.  We discussed it before about a 50-day moving average.  Some people will say they have to buy at the 50-day moving average.

To me, it’s one of the indicators that tell us it’s time to take a closer look at the stock and consider it as a purchase candidate or short-sale candidate, but it’s not a timing decision unto itself.  We have to look at the action closer on shorter-term timeframes.  Look at multiple timeframes for the evidence that shares are turning hands and buyers are regaining control.  Similarly, fundamental analysis, no one would buy a stock, or at least I hope not, just by looking at a P/E ratio and say, well a P/E ratio of 10 is a good deal.

I’m automatically going to buy it.

Right, that’s not what Warren Buffett does obviously.

Or a P/E ratio of 30, so I’m not going to buy it.

Right, or I’m going to sell it because of that.  A lot of times your best stock in the uptrends you’re going to buy them in a 30 multiple and sell them at an 80 multiple.

Especially for a day trader, that’s no big deal.

For day trading, short-term trading, it’s not.  It’s nice to know a little bit about what’s behind the company.  I do take a little bit of comfort in knowing what it is and asking myself a couple of questions about the fundamentals, such as are they selling more stuff?

Revenue is going, are they making more money than they were a year ago?  Are they making more money with selling more stuff?

Their trajectory, how are we doing?

Right, exactly.  What’s their business model?  Does it make sense?  That’s what to me, the fundamental story is all about.  If the numbers are there to back it up, and more importantly, price trend action supports it, then you’re onto something.  Where you can hold with a little bit more confidence rather than buying this nebulous banking stock, which no one knows what they’re doing or how to value the fundamentals, I don’t think.

Well we’re a step closer to peace between the two raging camps of technical and fundamental analysts.

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