From my experience, it’s definitely not an “either-or” question. Rather than limiting yourself, you must consider both fundamental information about the strength, quality, and soundness of the company and its products and the technical side of how a stock is performing in the marketplace. Basically, fundamental analysis is the foundation you must have behind every stock you buy. This will determine the quality and superiority of the stock. Technical analysis gives you the right timing and conviction to enter and exit the trade.
The best traders use both fundamentals and technicals tools to get better results than the average market participant. By using both techniques is how I generated $1.120.000 in my personal account since 2008 and made double digit returns for my clients in the fund I started last December 2011. I am about to launch The Warren Trades Newsletter because I see that there is a lack of investment newsletters that combine both type of analyses. I want to provide investment opportunities in both equities and fixed income that meets a solid fundamental story with an improving technical picture that gives me evidence that institutional investors are silently buying the stock before it moves.
By reading the book Market Wizards and studying the interviews, any investor can realize that successful institutional traders master both technicals and fundamentals to make their millions. Here are some quotes from top Market Wizards telling exactly that:
Colm O’Shea, ex prop-trader at Citigroup and founder of Comac Capital:
“You can’t be long or short just because you think fundamentally something is overprices or undervalued. Even thought something might be a good idea, you need to wait for and recognize the right time. I only implement a trade in the way that provides the best return-to-risk and limits losses in the event the trade is wrong. This can be done with a proper use of technical analysis and an understanding of market trends”
Scott Ramsey, founder of Denali Asset Management:
”In my early years in the business, I was able to trade the markets technically and make money, while keeping my drawdowns very manageable. But I wasn’t making the big money. I thought about what was holding me back. The lightbulb that clicked on for me was the realization that I had to also embrace fundamentals”
Michael Platt, ex- Credit Suisse prop traer and founder of Blue Crest Capital:
“In order to make money you need a decent fundamental story, a good technical trend that looks like it will carry on, and the market handling news the way you think it should”
Steve Clark, founder of Omni Global Fund:
“I have always thought that when you are trading over a short to medium term, your views on the fundamentals of a story are totally irrelevant. What you have to do is gauge what the market thinks of the story. If I didn’t see momentum develop, I would cut it, and if I did see upward momentum, I might increase the position size. I am a big believer in buying on the way up and using technical analysis.”
Martin Taylor, founder of Nevsky Fund:
“Once I have done the fundamental work and decidded to buy a stock, I will first look at the chart before putting on a position. The core is always fundamental but technical analysis is key for a correct risk-reward trade”
Paul Tudor Jones, founder of Tudor Investment Corporation:
”If anyone in the world was stranded on a deserted island, and they could only have access to one form of trading, either all the fundamental information in the world, or the access to charts for technical analysis, I would say that, and it’s not even remotely close, people would be foolish not to choose technical analysis every day of the week and twice on Sunday.”
Ed Seykota, top trend following trader. Mr. Seykota himself has put together a money management track record with returns of roughly +60% net of fees over the three-decade span of his trading career:
“If you want to know everything about the market, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it’s coming in, it’ll never happen. The market is always right. You should understand fundamentals but using superb technical tools is the key for solid returns”
To sum up, I believe that this is just a small piece of evidence that shows why a solid investment methodology must rely on both fundamentals and technicals.
I will expand on this concept on several additional posts. I will also detail investment opportunities that combine both approaches. But first I will ask you to do just one thing: subscribe to the blog and receive my updates via email. By that way I could be able to better send investment knowledge, solid trading alerts and other valuable information!