Saturday, April 18, 2015

Technicals vs Fundamentals

What is better?  1.  Trading mainly on technicals/charts or 2. Trading mainly on fundamental data/news?  Some will say they use both, or will have a trading bias and interpret the chart to fit that bias.  Without a doubt I vote for 2.  If you ever see me here saying you have to short something because its a double top, or buy something because its a double bottom, tell me to shut up.  Because it is nonsense.

Most chart readers, so-called technicians, which makes them sound like experts in the markets, have a bias on the market that they are viewing, and will draw trend lines and see patterns to fit their bias.  I have seen it over and over again.  The latest example was crude oil, where everyone and their mom was bearish crude oil as it tested $54 resistance, because it looked like a double top on the daily chart, and when it broke through, what should have invalidated their thesis, the chartists remained bearish, drawing up trend lines to say the market was short term overbought.

A trader that had no bias on a market, and traded purely based on technical analysis that can be formulated into an algorithm could make money, but that is not a technician, but a systematic trader.  But most of the traders that you see on the Twittersphere are discretionary traders who are paper napkin chartists.  They are a dime a dozen.  If you post a chart, and put a bunch of trendlines on it, it somehow makes it look more professional.

Most of the information on the internet is useless, or has negative value.  It takes a lot of digging and searching to find sources that are valuable.  And that is the easy part.  The hard part is interpreting the valuable data and news.  Some you take at face value, others are contrary indicators.

The job of a trader is to predict the future, based on the movement of prices, the news in the marketplace, and the supply/demand forces at work.  Depending on time frame, each aspect has a different level of importance.  What I've learned is that the intraday time frame, the one that draws in the most traders, is also the hardest to trade well.  That is because the best traders populate that time frame: the HFTs.  They are not just scalpers, but front runners, stop runners, and predatory position builders, who will seek out the weak hands and force them to say mercy.  The HFTs throw out feeler trades, to see which side is more eager.  If they see someone looking to accumulate, they front run it by buying ahead.  Likewise on the sell side, selling ahead of the distribution.

Trading full time makes intraday trading very tempting, because it can be viewed as a source of steady daily income, but on most days, it is difficult, especially in the futures.  In individual stocks, yes, intraday trading is much easier, especially the small-cap more speculative retail  traded stocks.  But the big markets, like S&P 500, FX, bonds, crude oil, etc. are filled with HFT sharks.

From experience, the biggest edge is found based on taking a position at a good price, with supply/demand economic fundamentals supporting that position, and holding on to it for big gains.  This is done over several months, not a few days.

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