Sunday, January 07, 2007


Haven't I taught you people anything?

So I put up my reader poll on Friday and so far only 25 percent of you have gotten the correct answer, which of course is "fundamental analysis". I know that the rest of you chartists think you can actually develop profitable trading systems based on the rantings 12th century Italian mathematicians and other such nonsense, but let me assure you, time will prove you wrong. Technical analysis is pseudo science. Good science backs up everything with empirical data, not with anecdotes and assertions. Have you ever had the misfortune of opening up one of those technical trading books? Eek! Assertion after assertion. Where's the proof? Where's the evidence? There is none, because when one tries to take the assertions of technical analysis to the data, the data typically win. I've said it before, and I'll say it again, technical analysis is just like astrology, but a lot less interesting.

I guess, in short, I understand trading based on news, and I (sort-of) understand value investing, but I don't understand how one would go about doing short-term trading on fundamentals.

The markets are pricing in everyone's best guess about what the fundamentals will look like in the future, right? So, whether you trade fundamentals or technicals, you've still got that nagging problem of being unable to predict the future. Isn't there still a bit of black magic in figuring out what multiple you'd be willing to pay (especially if the company is actually losing money)? More of an art than a science, still, right?

I used the little search bar on your blog to search for "fundamental analysis" and got no hits other than this post. Do you have an entry that describes the way you trade fundamentals?
The correct answer is both, both have their place. Fundamentals (news) are what move stocks. But technicals (support and resistance) define where the move will go to before pausing. And technicals also define, in the absence of news, how far a stock will go down and up before correcting the other way (oversold or overbought oscillators). So, fundamentals are the prime mover, but at a slow rate (news comes out of the blue, and not every day). For the every day movement, technicals rule.
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