Best Thread How do technical traders fit into the greater scheme of things?

[tommog]

Hi,
Im interested to know how economists or fundamental analysists feel technical traders fit into the greater scheme of things. Very often a technical trader will be going against the overall fundamental picture. If enough traders are trading this way is it enough to halt a natural fundamental move? I believe markets are there to meet the needs of fundmental decisions. Such as U.S increasing interest rates the FX market is there to allow people to transfer their savings into dollars to make the most of the increased yield. The thought that people only use an exchange to put squiggily lines on makes it seem a little bit pointless having a market, im not arguing whether it "works" or not im just saying how is it any different to a strategy to use in vegas?

Having said this i am a professional trader using almost exclusively a technical approach. This is how i make money. I would love to take a fundamental approach but i have never been able to make assumptions with a high probability outcome this way.

I dont mean this to sound like a traditional "which is best technical analysis or fundamental". My question is to those of you more experienced economists, has their been a negative impact on fundamental trading since the rise of technical traders? Or in your opinion do they compliment each other? If in your opinion they dont compliment each other where does this leave the world of economics if more and more people make financial decisions not based on sound reason but computerised algorithms?

Id appreciate the insights of somebody clever enough to see the markets from an economic standpoint

 

[Trader333]

Im interested to know how economists or fundamental analysists feel technical traders fit into the greater scheme of things.

They probably don't even consider it.


Paul

 

[dbphoenix]

They probably don't even consider it.


Paul

I agree. If fundamentalists take notice of technicians at all, they are probably more amused than anything else.

Db

 

[bbmac]

I once heard a successful fund mananger who based trading decisions purely on fundamentals call technical traders, 'star gazers' and insisted he didn't know any that made money. Generally speaking, fundie traders are more closed to technical ideas/methods than techies are to fundamental analysys it seems.

I'm reminded of a great story about a fundie and a techie walking past a skyscaper and on looking up saw a huge chunk of the roof had come off and was hurtling it's way down to the ground above them. The techie jumped clear and was saved, the fundie just stood looking and did not move. The giant piece of the building hit him and fatally injured him, and with his dying words on being asked by the techie why he too didn't jump safely clear of it's path, he replied 'I thought it would go back up.' Lol.

Overall there is no doubt that it is the perception of value based on fundamental factors (socio, political,economic) that drive price but within those moves Technical analysis plays a part, and is a useful tool from which to develop a trading edge. Further there is much evidence that since the wide useage of tech analysis some market moves within the general fundamentally led moves are purely technically based/led.

 

[TheBramble]

Overall there is no doubt that it is the perception of value based on fundamental factors (socio, political,economic) that drive price

Are you sure about that? I've yet to be convinced that it's not price driving the fundamentals.

 

[tommog]

Overall there is no doubt that it is the perception of value based on fundamental factors (socio, political,economic) that drive price

Id like to think so, but what about traders that react to a break of a level/bounce of a level MACD cross... lunar eclipse whatever it may be that causes an influx of traders to enter the market. It could push the price and therefore affect fundamentals in an unnatural way? By "unatural" i mean a factor outside the supply and demand of the physical market. For example crude reserves are low, there is shortage in supply prices market should go up but a major resistance level forces prices down. Does this play a part in a fundamental view of the market?

 

[dbphoenix]

I'm reminded of a great story about a fundie and a techie walking past a skyscaper and on looking up saw a huge chunk of the roof had come off and was hurtling it's way down to the ground above them. The techie jumped clear and was saved, the fundie just stood looking and did not move. The giant piece of the building hit him and fatally injured him, and with his dying words on being asked by the techie why he too didn't jump safely clear of it's path, he replied 'I thought it would go back up.' Lol.

The story, however, has more to do with competence than with FA v. TA. There are plenty of technicians who would stand there hoping for a reversal and be squashed flat, just as there are plenty of fundamentalists who would have taken at least some profits at the first sign of trouble, then stood aside until value was found once again (which, in this case, would likely be never, and the fundamentalist would then move on to something else, his funds intact).

Db

 

[dbphoenix]

Id like to think so, but what about traders that react to a break of a level/bounce of a level MACD cross... lunar eclipse whatever it may be that causes an influx of traders to enter the market. It could push the price and therefore affect fundamentals in an unnatural way? By "unatural" i mean a factor outside the supply and demand of the physical market. For example crude reserves are low, there is shortage in supply prices market should go up but a major resistance level forces prices down. Does this play a part in a fundamental view of the market?

Technical traders have an exaggerated opinion of their influence on the market. To think that a MACD anything would have any effect on price movement would assume that (a) a great many traders are using MACD and that (b) those who do are using the same settings, looking at the same timeframe, displaying the indicator in the same way, employing it in the same way, etc. Given the overwhelming number of variables, whatever one thinks one sees with regard to some reaction to what one thinks an indicator is doing is more likely wishful thinking than anything else (ditto stochastics, trendlines, pivot points, fib, and so on).

Beyond that, fundamentals have only a casual relationship with price, which is why fundamentalists generally could not care less about daily -- or even weekly -- fluctuations in price. They are concerned with "value". They just define value in a different way than technicians do.

Db

 

[Jack o'Clubs]

All good contributions, two things to add:

1) varies by market - as a recent PM from another forumite made clear, the wholesale market in FX uses TA quite a bit more than the equity pros for example.

2) the two are more interlinked than I think most people realise. At the very least, you might wonder whether a chart in freefall was telling you that there was something fundamental that you hadn't yet understood...

 

[tommog]

Beyond that, fundamentals have only a casual relationship with price, which is why fundamentalists generally could not care less about daily -- or even weekly -- fluctuations in price. They are concerned with "value". They just define value in a different way than technicians do.

If fundamentals only have a casual relationship with price i assume that you mean fundamentals in your opinion dont play much of a role in dictating the price. What in your opinion has a strong relationship with price? I dont mean this in a "how do you predict price" style question. You can take into account hindsight perspective. If fundamentals dont have much of an influence then something has to make people want to trade otherwise prices would remain static. If you say human psychology, appetite for risk, greed, fear opinions etc, these are all by-products of some form of analysis or another be it technical or fundamental.

Also what do you mean by "they just define values in a different way to technicians do" everybody defines value in a different way. Every time you trade its because somebody has a different percieved value to you otherwise you wouldnt get filled, i dont see how there is a gulf between fundamental and technical perception of value.

Which brings me back to the original question of whether technical and fundie support each other or contradict each other?

 

[dbphoenix]

If fundamentals only have a casual relationship with price i assume that you mean fundamentals in your opinion dont play much of a role in dictating the price. What in your opinion has a strong relationship with price? I dont mean this in a "how do you predict price" style question. You can take into account hindsight perspective. If fundamentals dont have much of an influence then something has to make people want to trade otherwise prices would remain static. If you say human psychology, appetite for risk, greed, fear opinions etc, these are all by-products of some form of analysis or another be it technical or fundamental.

Also what do you mean by "they just define values in a different way to technicians do" everybody defines value in a different way. Every time you trade its because somebody has a different percieved value to you otherwise you wouldnt get filled, i dont see how there is a gulf between fundamental and technical perception of value.

Which brings me back to the original question of whether technical and fundie support each other or contradict each other?

Fundamentalists focus on the value of the company. Technicians focus on the price of the stock. Confusing the company with the company's stock is what got so many fundamentalists (or, if you will, fundamentalist wannabees) in so much trouble eight years ago.

Price is determined by what the buyer and seller agree upon as a fair value for the stock. This need not and generally doesn't have anything to do with the fair value of the company. Whether or not this is a "gulf" depends on how one defines gulf. But it's more than quibbling.

As to whether FA and TA are mutually supportive or contradictory, the relationship is more of driver and driven, fundamentals being the driver.

Db

 

[TheBramble]

As to whether FA and TA are mutually supportive or contradictory, the relationship is more of driver and driven, fundamentals being the driver.

An interesting and commonly held view, but it doesn't really stack up and it only takes a little ‘new way of thinking’ to discover why.

Take NR as a more obvious recent example.

At what point did the fundamentals indicate a problem?

At what point did the Technicals indicate a problem?

More importantly, at what point did fundamentalists appear to be taking action on their ‘knowledge’ and at what point is it possible to discern that the technicians took their cue?

To make any sense of that you have to understand where the big money was in NR (as an index constituent) and what they did, or more significantly in relation to this question, what they did not do.

The idea of fundamentals leading price are an easy and comfortable Economics 101 view, but one which does not serve in reality.

 

[Jack o'Clubs]

An interesting and commonly held view, but it doesn't really stack up and it only takes a little ‘new way of thinking’ to discover why.

Take NR as a more obvious recent example.

At what point did the fundamentals indicate a problem?

At what point did the Technicals indicate a problem?

More importantly, at what point did fundamentalists appear to be taking action on their ‘knowledge’ and at what point is it possible to discern that the technicians took their cue?

To make any sense of that you have to understand where the big money was in NR (as an index constituent) and what they did, or more significantly in relation to this question, what they did not do.

The idea of fundamentals leading price are an easy and comfortable Economics 101 view, but one which does not serve in reality.

Tony,

This is a somewhat Socratic discourse (), but if I interpret what you're saying correctly I think you are confusing the action that analysts and fund managers who use fundamentals took, and the fundamentals themselves. I didn't see a massive disconnect between the fundamentals and the price through the NR drama, but then I could be cool and dispassionate as I wasn't a panicking shareholder seeing my annual return go down the toilet!

 

[TheBramble]

I think you are confusing the action that analysts and fund managers who use fundamentals took, and the fundamentals themselves.

Which was what?

I didn't see a massive disconnect between the fundamentals and the price through the NR drama, but then I could be cool and dispassionate as I wasn't a panicking shareholder seeing my annual return go down the toilet!

My point. What did YOU consider to be the fundamentals of NR before the news started to breaK and during the break? What were you using to assess the fundamentals of that particular company?

The fact is, the technicals were in the charts since late March...

 

[fibonelli]

What funnymentals have pushed up the DJIA +10% in the last 8 weeks?

What funnymentals have been ignored? Why?

 

[SOCRATES]

Both the fundamentals and technicals in this particular case are irrelevant.

The fundamentals have been used as the excuse and the technicals as the justification for that excuse.

The truth is, an opportunity descended upon savvy traders to take advantage of the situation as it developed. This overview will undoubtedly be challenged, but from the viewpoint of an underview instead.

 

[ducati998]

In the current markets, technicals are an irrelevancy. If you measure importance by the weight or amount of money placed, the only two methodologies that carry any import are;

*Quant
*Fundamental

Hedge Funds tend to be Quant driven.
Private Equity, Corporate, tend to be Fundamental.
Mutual, Insurance, Pension Funds tend to be Fundamental.

Proprietary Trading firms tend to Quant, with a smattering of technicals.

jog on
d998

 

[fibonelli]

Do you mean the same quants that are valuing their worthless CDOs, MBSs, ABSs, ABCP or other smelly sausages at "marked to (fantasy) model"?

The Quants Explain Disaster
".........Buffet and Munger weren't the only ones warning about excessive leverage. Jim Rogers, Doug Kass and Nouriel Roubini have been talking for 2 years about how this leverage, combined with a real estate and credit bubble and opaque, poor rated and poor quality derivatives was eventually going to blow up.

What amazes me so much about these quant models (and we might as well throw LTCM in there) is that they consistently assume that prices in a market follow a lognormal distribution. In other words, they look like a bell curve.

But statistical research has shown time and again that prices are leptokurtic. In English, prices spend a lot more time around the mean than standard models predict, but they also have fat tails; there are more extreme events than standard models would predict. And most of those extreme events are to the downside.

I'm getting pretty tired of hearing all of these blown up funds talk about "once in a millenium" events causing their meltdowns. Options traders have known for years about how price distribution works, which is why the good ones make a lot of money - particularly on these extreme events.

These guys are so full of ....... they're going to pop - right along with the brilliant models they've designed. I actually heard that some of these quants had said that volatility was dead. Didn't these guys ever hear of reversion to the mean? For a bunch of mathematicians, they aren't too bright.

Why is it that Wall Street never seems to learn from its own history. I think I remember what happened to Icarus when he flew too close to the Sun.....".
http://bigpicture.typepad.com/comments/2007/08/the-quants-expl.html

In the current markets, technicals are an irrelevancy. If you measure importance by the weight or amount of money placed, the only two methodologies that carry any import are;

*Quant
*Fundamental

Hedge Funds tend to be Quant driven.
Private Equity, Corporate, tend to be Fundamental.
Mutual, Insurance, Pension Funds tend to be Fundamental.

Proprietary Trading firms tend to Quant, with a smattering of technicals.

jog on
d998

 

[Jack o'Clubs]

My point. What did YOU consider to be the fundamentals of NR before the news started to breaK and during the break? What were you using to assess the fundamentals of that particular company?

The fact is, the technicals were in the charts since late March...

Funny that, in late March I turned down a one-off job offered by a friend who was going to pay me in off-plan property. I hadn't looked at a NR chart, but had a very strong fundamental view on the prospects for the UK new-build buy-to-let sector. Would not have been too complicated to extend that to the most exposed mortgage provider, had I been a NR shareholder. There was at least one major fundamentals based sell-side firm shouting 'sell' on NR from a long way back (Citi IIRC).

 

[TWI]

The best trades are always those where you can be confident of the longer teem fundamental picture and then use technicals to get in on the counter moves.
I know that technicals alone can work well but if you want to really take some big bets with confidence then knowing the underlying longer term driver will be the best help you will have to make money.