# Technical analysis vs fundamental analysis: Technical analysis wins!



## Pluto (Sep 12, 2013)

http://www.marketwatch.com/story/te...d=MW_story_recommended_default&Link=obnetwork


Ground breaking study says technicals out perform fundamentalists. 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2648292


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## tkirk62 (Jul 1, 2015)

Yeah. Using analyst recommendations on one particular television show should not be considered representative of an entire investing methodology.


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## Pluto (Sep 12, 2013)

Well, any study will be a sample of a whole. They claim "Top" technicians vs "top" fundamentalists. 

I suppose some would prefer "bottom" technicians vs "top" fundamentalists, and then claim that is representative of the whole since that would fit with their preconceived ideas.


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## tkirk62 (Jul 1, 2015)

No, just using analyst recommendations at all is what I view as flawed. I don't have any data to back me up but I bet if you made Warren Buffett or Joel Greenblatt recommend stocks on tv, the returns of those recommendations would be less than the returns of his portfolio. "Top" analysts seems very subjective as well. Technical analysis is also better suited to short term returns like those viewed in the study, since it is based on investor sentiment.

I have no horse in the race. I think using any information or insight available is good, and both fundamental analysis and technical insight should be considered. But you can not declare a "winner" between two investment strategies based on one study, which is looking at past returns, which we all know is a poor way to determine future returns. And there is no need to determine a winner. You can (and should) use both sets of information.


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## Moneytoo (Mar 26, 2014)

"Considering market indexes, Treasuries, commodities, and various equity indexes, both schools of recommendation generate poor forecasts. Overall, the evidence shows that proprietary trading rules could, at best, enhance investments in single stocks, while returns on broader assets are unpredictable." 

Sigh...


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## fatcat (Nov 11, 2009)

first, i would be suspicious of this small study since researchers have been studying technical analysis for a very long time and found no enduring statistical significance that it actually works

second, even if it were true it says little about the long term success of stock picking and we know from all kinds of available sources that over long periods it's extremely hard to beat the market 

i suspect it will be really good for the show and the guy who is the technical trader


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## Pluto (Sep 12, 2013)

I think one shouldn't draw conclusions about the study without reading the study. 

Technical analysis is not restricted to a short term horizon. Technical indicators can be employed with any time horizon one has market data for. 

For example, using a 10 year time horizon one can see if the S&P, or any index is over sold or over bought - long term. Right now it is neither overbought or oversold, its in the middle but trending toward being oversold. Interestingly, "oversold" on a long term basis, and good value seem to correlate.


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## Pluto (Sep 12, 2013)

fatcat said:


> first, i would be suspicious of this small study since researchers have been studying technical analysis for a very long time and found no enduring statistical significance that it actually works
> 
> second, even if it were true it says little about the long term success of stock picking and we know from all kinds of available sources that over long periods it's extremely hard to beat the market
> 
> i suspect it will be really good for the show and the guy who is the technical trader


Why should I believe you? Did you ever read the encyclopedia of technical analysis, by Colby & Meyers? It is filled with research from beginning to end. Although you imply you are familiar with all the research, I think you are not.


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## tkirk62 (Jul 1, 2015)

I read the study. They used 3 month to 9 month returns. But I have rarely heard (and never heard anyone credible) claim they know where a stock will be in nine months based on the fundamentals of the company. 

The study does raise the interesting POSSIBILITY that technical analysis MIGHT offer a REASONABLE PREDICTION of where stocks will be in 3 to 9 months. That's all that can be claimed. Another study comes out with a longer time frame, a different sample, then things become a little more clear. One study is not enough to prove or declare anything.


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## Pluto (Sep 12, 2013)

Moneytoo said:


> "Considering market indexes, Treasuries, commodities, and various equity indexes, both schools of recommendation generate poor forecasts. Overall, the evidence shows that proprietary trading rules could, at best, enhance investments in single stocks, while returns on broader assets are unpredictable."
> 
> Sigh...


That's because they don't practice what the best do. 
Buy quality stocks at a time of high pessimism. If one is to sell, sell at a time of high optimism. A very pessimistic outlook is a very good predictor of a rising market. I think if you can find some articles dated around Feb March 2009 you get an idea of what pessimism is. An optimistic to euphoric market is a good predictor of trouble ahead. EG 1999-2000 and 2007. 

Anyway, if one buys quality and pays too much, one will survive. Ultimately the focus is on quality.


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## Moneytoo (Mar 26, 2014)

Pluto said:


> Anyway, if one buys quality and pays too much, one will survive. Ultimately the focus is on quality.


Yep, that's the hope - for example, I just bought Apple and Disney in August mid-way between top and bottom. And a TA from RFD forum who sometimes gets it right, got Disney at a slightly better price (but still not near bottom). And then we both missed out on Starbucks while waiting for the better price... 

In general, I agree that it's better to use both fundamental and technical analysis. But I've seen enough examples when both of them were wrong (and don't think I can do a better job myself), so "buying the dips" seems to be the best I can do...


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## fatcat (Nov 11, 2009)

Pluto said:


> Why should I believe you? Did you ever read the encyclopedia of technical analysis, by Colby & Meyers? It is filled with research from beginning to end. Although you imply you are familiar with all the research, I think you are not.


first, i have never seen any significant body of research that demonstrates the effectiveness of ta (i don't enough good years left to devote any of them to mr. colby and mr. meyers)

second, i have my own stock market theory that goes something along the lines of "if it really worked everyone would be using it" and ta violates that rule because overwhelmingly we see fundamental analysis as the bedrock paradigm for equity buying and selling (which is not saying that ta isn't used as an adjunct by many)

if ta actually worked we would live in a ta world but it simply doesn't hold up and there is no large body of well-replicated research to show that it does

the fact is, nothing really works very well when it comes to stock picking because the amount of variables that conflate a stock price is for all practical purposes infinite and that essentially means that you are predicting the future and nobody does that very well at all

does ta sometimes work ? .... sure and perhaps it proves useful as the last bit of the puzzle when deciding to buy or sell


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## godblsmnymkr (Jul 15, 2015)

i think people are looking at this the wrong way. its not about if it works. for TA to be an effective tool, it doesnt have to work 100% of the time. *trendlines and support/resistance is absolutely something that impacts equity price movements.* that is a fact. so looking at it that way using TA in buying/selling considerations is absolutely important. people think "oh, this cupandhandle pattern didnt work. TA is bs." wrong way to look at it. TA is just a means of using odds to help you guess the probability of price movements. thats all.


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## Moneytoo (Mar 26, 2014)

godblsmnymkr said:


> *trendlines and support/resistance is absolutely something that impacts equity price movements.*


My problem is, that once it's broke the support - no way to know how far it'll go... And I usually don't have the time to try to catch it on the way up. Still trying though


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## Mockingbird (Apr 29, 2009)

godblsmnymkr said:


> ...... "probability of price movements". thats all.


I'm glad someone gets it. 
It's a tool. The rest is your money/trade management.


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## james4beach (Nov 15, 2012)

I mainly use technical analysis as an assistive tool. I do fundamental analysis and then use T/A to help me execute the strategy. One of the reasons I think it's great for this is that T/A helps you *observe* what the rest of the market believes. I don't see it as predictive, but I think charts tell a story. For example, let's say you research a stock and think you understand everything about it ... and are convinced you want to buy it.

So you watch the charts. Well, the thing keeps plummeting. It rallies up to its 200 day average, fails to hold it, and gets sold off again. Repeatedly hitting lower lows on heavy volume. Unable to find support. Multi-year lows, and going lower. The T/A is telling you that everyone is dumping this stock and it's likely it will keep declining.

At this point you say to yourself. "Hmm, my research shows the stock is already fairly valued and is worth buying here. But the market thinks something else ... the chart is telling me that many people believe the stock is worth much less. Why is that? Perhaps they know something that I don't know."

Indeed, it turns out that their earnings outlook is terrible, or there was some factor you missed. The market was right, and you were wrong. The T/A communicated something very useful to you by showing you a picture of what every other investor was deciding.

This doesn't always work... for instance, people often get caught up in irrational buying. I think this is why using T/A to chase a rally is a dangerous use of T/A. However, in my experience, it's not as common for people to engage in irrational selling. So when T/A shows a bearish chart, you should take it seriously.

Thus: technical analysis saves butts during bear markets. People who knew how to read charts, understood in 2001 or 2007-2008 to get out of stocks that were plummeting. I encountered numerous people on message forums who invested in a financial stock (examples are CFC and FNM), but were convinced it was a solid holding ... even while the stock plummeted, and technical analysis showed that the stock was toast.

The people who ignored the charts were destroyed; they lost everything. Simply, their own analysis was incomplete and erroneous.


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## james4beach (Nov 15, 2012)

Extension to this. Yes people sometimes get caught up in irrational buying so you don't want to buy something just based on T/A. But if you've done your own fundamental analysis and decide to buy a stock, AND the charts show a strong chart that's bullish ... now you are seeing an alignment between your own belief and the rest of the market. That's a good scenario to buy something.


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## CPA Candidate (Dec 15, 2013)

T/A may be useful for those would invest in stock prices in the short term but has no value for what something will be worth 2, 5 or 10 years hence. I see it mostly as an indication of short term emotions (including boredom) which has momentum in both directions and tends to be self-fulfilling. I don't have any problem ignoring it because the market is not moved by facts as much as perceptions. Reality defies perception all the time.

When I think of the famous investors that I admire, none of them place any importance on technical analysis. If you take a look at a 10-20 year chart of any successful company, you could find a multitude of technical buy and sell signals along the way, but those that simply held the stock did well without the drama. This is the basic premise of index investing.

I was reading today that Warren Buffet keeps increasing his stake in IBM, just as the stock have performed poorly lately. The market or the technicals are telling you that you should sell IBM. So, does the market know more than WB? That's up to you to decide. I don't recall hearing of any billionaire chartists, though.


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## GoldStone (Mar 6, 2011)

Step One: figure out who you are. Are you a trader or an investor? Time frame is the key difference between the two. Traders think in days, weeks, months. Investors think in years or even decades.

Step Two: pick the right tool for the job. Traders use T/A. Investors use fundamental analysis (or index).

To argue which tool is better is rather pointless. They are not meant for the same job.


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## GoldStone (Mar 6, 2011)

BTW, figuring out who you are is really important. Folks who confuse trading and investing can't be good at either of these.

This is a good read:

Don't Even Think About Trading Places in Markets


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## fatcat (Nov 11, 2009)

all i want to see is multiple well-conducted and replicated studies that show conclusively that ta works
shouldn't be that hard

pluto's study goes out 6 months and seems to show very significant results, described as "groundbreaking" - let me define that for you, read, _nobody's ever done this before_ this means that we need many more studies to replicate the results

i promise you that if indeed this works then the viewership of that show is going to going to go up by 1000%
only problem is, everyone will be chasing the same "technically correct" stocks which will really screw things up


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## MrMatt (Dec 21, 2011)

godblsmnymkr said:


> ...TA is just a means of using odds to help you guess the probability of price movements. thats all.


Assuming that, and efficient markets, and you get a standard risk adjusted return.
Just like fundamentalists.

For either method to outperform the market assumes a pricing inefficiency.

That being said, I can't accept TA as a method, it depends highly on the bigger fool theory, I can't bet serious money that I'm right while everyone else is wrong. I'd rather just buy a good profitable company and let it be.


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## godblsmnymkr (Jul 15, 2015)

fatcat said:


> all i want to see is multiple well-conducted and replicated studies that show conclusively that ta works
> shouldn't be that hard


I'm going to probably stop trying to illuminate people soon because its getting frustrating but here you go:

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do you see the price action reacting to the trend lines? that is showing you that TA influences price action. this whole argument TA vs FA is pointless. you should be using every tool at your disposal to help you make financial decisions. i dont care who "wins."


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## Pluto (Sep 12, 2013)

Moneytoo said:


> My problem is, that once it's broke the support - no way to know how far it'll go..


The goal is not to buy at the exact bottom, as that's a fool's errand. 
The idea is to 
1. have a list of quality stocks, and
2 . estimate a realistic good to excellent price. Don't buy until it gets into that range. 

3, after it gets into that range, one can use ta to assist in timing the purchase. 

For example, Some TA's follow the rule never buy immediately after a run up in price. Fundamentalists generally don't care. 
So both may agree that AAPL is a great company, and the fundamentalist would buy it when it was 130, around July 20, whereas the technical analyst would not because it just ran up in price. The TA guy would wait for it to consolidate. A good TA can make better money even though they buy the same stock. 

And personally I don't really care what people do with their money, i just give my opinion on such subjects in case there are people who are interested in refining their approach. 

the essence of my point here is, you don't know where the bottom is, but you can avoid buying near a top, and if you do that, you have an edge. Optimism-pessimism, greed-fear, cycles help to avoid buying near a top.


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## Pluto (Sep 12, 2013)

fatcat said:


> all i want to see is multiple well-conducted and replicated studies that show conclusively that ta works
> shouldn't be that hard
> 
> pluto's study goes out 6 months and seems to show very significant results, described as "groundbreaking" - let me define that for you, read, _nobody's ever done this before_ this means that we need many more studies to replicate the results
> ...


fatcat, 

you just said in a previous post that you would not look at Colby / Meyers research. Now you say all you want is to see studies. 
Face the facts: You have a preconceived conclusion, and nothing will sway you from it. you are an ideologue preaching your preconceived conclusion. 

Everyone will not buy the technically correct stocks. The same argument can be used for a fundamentalist approach: If everyone did it, it wouldn't work because everyone would be buying the fundamentally correct stocks. Don't you get that?


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## Pluto (Sep 12, 2013)

godblsmnymkr said:


> I'm going to probably stop trying to illuminate people soon because its getting frustrating


don't get frustrated. Fatcat is an ideologue and perhaps a troll. Don't let the ideologues determine what you post.


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## Pluto (Sep 12, 2013)

CPA Candidate said:


> I was reading today that Warren Buffet keeps increasing his stake in IBM, just as the stock have performed poorly lately. The market or the technicals are telling you that you should sell IBM. So, does the market know more than WB? That's up to you to decide. I don't recall hearing of any billionaire chartists, though.


It isn't clear to me why you would claim "the technicals are telling you that you should sell IBM..."

I don't buy your assumption about "the technicals".

This looks like the case of a guy who didn't know a thing about carpentry, who tired to build a house and failed, then said "carpentry is a failure".


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## Synergy (Mar 18, 2013)

CPA Candidate said:


> I was reading today that Warren Buffet keeps increasing his stake in IBM, just as the stock have performed poorly lately. The market or the technicals are telling you that you should sell IBM. So, does the market know more than WB? That's up to you to decide. I don't recall hearing of any billionaire chartists, though.


Over the past 5 yrs Mr Market (S&P500) has outperformed WB (BRK). In this case, one might say that the market "knew" more than WB. Mr Buffet may be loosing his "touch"? But then who knows what will happen over the next 5-10 years.


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## Moneytoo (Mar 26, 2014)

Pluto said:


> And personally I don't really care what people do with their money, i just give my opinion on such subjects in case there are people who are interested in refining their approach.
> 
> the essence of my point here is, you don't know where the bottom is, but you can avoid buying near a top, and if you do that, you have an edge. Optimism-pessimism, greed-fear, cycles help to avoid buying near a top.


Yes, I'm interested in refining my approach - which seemed to work fine until recently (just watching a stock for a few months and buying it when it dips - as it would bounce back right away), but is getting more difficult now (as more often than not it keeps dropping lower...) So I think I've "mastered" buying close to the middle between top and trough on the way down, now want to learn to buy when it's turning back up, as most TAs recommend...


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## fatcat (Nov 11, 2009)

Pluto said:


> don't get frustrated. Fatcat is an ideologue and perhaps a troll. Don't let the ideologues determine what you post.


you can puff hot air until armageddon (and you almost certainly will) but it won't change the fact that there is no evidence that ta works, none ... 

your little study, entertaining though it may be needs to be followed by a lot more studies and that is unlikely because ta is so rife with pre-conceived fantasies and a propensity to see patterns where none exist that it becomes very difficult to actually test

ta is profoundly irrational exactly like astrology and both exist in a fairy-land of untested, entirely self-confirmed biases ...
which is not to say that they both can't be a lot of fun


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## Pluto (Sep 12, 2013)

fatcat said:


> your little study, entertaining though it may be needs to be followed by a lot more studies and that is unlikely because ta is so rife with pre-conceived fantasies and a propensity to see patterns where none exist that it becomes very difficult to actually test


I gave you a reference for a book full of studies Colby / Meyers. They tested virtually every TA indicator under the sun. You wrote you would not read it, remember? Then you claim you have no evidence. There is not evidence *for you* because you decline to look at it.


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## godblsmnymkr (Jul 15, 2015)

pluto
better things to do with your time then waste it on a crazy person


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## lonewolf (Jun 12, 2012)

Pure technical from my understanding is using price only.

Record high NYSE margin debt or just coming off of the record high NYSE margin debt, with record low levels of cash in mutual funds as was seen in August would that not fall under fundamentals ?


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## Pluto (Sep 12, 2013)

MrMatt said:


> For either method to outperform the market assumes a pricing inefficiency.


Well why was aapl 132 in July, and about 30% lower in august at about 103? Do you have a fundamentalist explanation? a market inefficiency explanation? 

So you, a fundamentalist would be fine buying at 132 because the fundamentals are fine. But a technician knows stocks consolidate after a run up in price and would not buy there. Why would you buy right before the stock consolidates and suffer a 30% correction in the stock?


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## MrMatt (Dec 21, 2011)

Pluto said:


> Well why was aapl 132 in July, and about 30% lower in august at about 103? Do you have a fundamentalist explanation? a market inefficiency explanation?
> 
> So you, a fundamentalist would be fine buying at 132 because the fundamentals are fine. But a technician knows stocks consolidate after a run up in price and would not buy there. Why would you buy right before the stock consolidates and suffer a 30% correction in the stock?


I didn't buy (or sell) AAPL at $130, it's not an unreasonable price, ask me in 5 years if I was right or wrong.

I did sell a large portion of my AMBA stake in June at $115 as it was overvalued at that time.

I don't see your point, it seems based on your analysis you thought the market was overpaying for AAPL at $130, seems a bit arbitrary.
Better question is if you think AMZN or GOOG are correctly priced now or not, they've both had a good run up.


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## Pluto (Sep 12, 2013)

MrMatt said:


> I don't see your point, it seems based on your analysis you thought the market was overpaying for AAPL at $130, seems a bit arbitrary.
> /QUOTE]
> Doesn't seem arbitrary to me. At 132 it reached the upper range of where the market values it. And it just had a terrific run up in price. And the overall market has been over valued according to CAPE. And the overall market has got sensitive to negative news and it is looking like it is due for a reset. I sold AAPL at about 126 on the way up. If I buy it back at 103 or lower, is that bad?
> 
> Anyway, the fact that you think 132 was a good price, immediately before a consolidation is an example of why the Technicians won.


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## etfstrader (Sep 26, 2014)

I find many novice investors or novice traders thinking once they know how to do TA on stocks, they think they know how to time their entry/exit with consistent gains. In reality, it's more complicated than that. They also need to know how to do TA on stock markets. Doing TA on stock markets is not just simply drawing support and resistance lines and using common indicators, they also need know how and when to apply market breadths indicators, sentiment and seasonality stuff for different time-frame charts. 

TA is not a crystal ball, but one knows how to use it properly it will help to minimize risks to invest or trade on the wrong side. Imagine there are trillions of $$$ involved for each trend reversal including short/medium/long term. How can big boys tell when to bet in their money? How can some successful people make tons of money from stock markets? Well, there should be a pattern that they follow. If you know how to recognize that pattern from TA, then making money is just a figure to you.


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## etfstrader (Sep 26, 2014)

I make this simple chart setup to show stock markets having high tendency of minor to serious corrections every time when the blue line falling to the bottom (check the red circles.) The indicator from this chart proves why TA is a very useful tool to identify and mitigating risks.


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## tkirk62 (Jul 1, 2015)

etfstrader said:


> I make this simple chart setup to show stock markets having high tendency of minor to serious corrections every time when the blue line falling to the bottom (check the red circles.) The indicator from this chart proves why TA is a very useful tool to identify and mitigating risks.
> View attachment 5977


What are those blue lines measuring?


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## SteveCollins (Oct 8, 2015)

*good question*

I trade forex and I can tell you that Technical is the best approach. I have seen a lot of fundamental reports that say one thing and the market moves in the opposite direction . Reason is that the report was anticipated ahead of time and the market has already made the move. Steve


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## Pluto (Sep 12, 2013)

SteveCollins said:


> I trade forex and I can tell you that Technical is the best approach. I have seen a lot of fundamental reports that say one thing and the market moves in the opposite direction . Reason is that the report was anticipated ahead of time and the market has already made the move. Steve


Steve, I think you are a guy who knows of what he speaks. Understanding that market participants anticipate and their anticipation shows up in price and volume action is essential.


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