Fundamental Analysis vs Technical Analysis

In my broking days I remember an old dealer who loved charts. With a chart in his hand this old sage of the market could render hours of painstaking fundamental research meaningless. “It’s a typical head and shoulders pattern,” "The 11 day moving average has crossed the 30 day, it’s a buy!” “It’s fallen through support levels, this thing is tanking!” In the world of Institutional equities research technical analysts are usually scoffed at… and for good reason – they often get in wrong, although funnily enough in hindsight they are always right.

The thing is fundamental analysts often get it wrong as well, I remember being told early on in my days that if you get more calls right than wrong you’re doing well. So which is better? Well it depends, you could point to a fundamental analyst such as Warren Buffet and say – there is a guy who got it right more times than he got it wrong and he’s probably the most successful investor of all time. But what if you’re not an investor? What if you are… that’s right I’m going to use that dirty word, a “trader?” Successful traders know that being right isn’t the most important part of making money. In fact a lot of successful traders get it wrong more often than they get it right but still make money. Why? Because they cut their losses quickly and let their profits run. They don’t need to be right even half the time to make money.

I’m an investor and I don’t pay too much attention to charts, I don’t think there’s anything wrong with technical analysis I just stick to what I know best and that’s researching company fundamentals. Bollinger bands, MACD, Candlestick charts, resistance and support levels, Relative strength, On balance volume it’s all interesting stuff, however don’t get carried away trying to find the holy grail of technical indicators that’s going to be right 100% of the time. If you do chances are you’ll be very disappointed just as you will be if you blindly follow the calls of fundamental research analysts.

Now that I remember that old sage – he was a wealthy guy, owned several pubs in the Sydney CBD a couple of houses and drove a Benz. Right I’m off to see if I can find my old SIA notes on technical indicators.