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

[TheBramble]

TWI - regardless, for the moment, of any position on which drives which, are you advocating fundamental analysis on a per instrument (stock) basis or just at the sector or market level - or all of them?

 

[TWI]

I am refering to more specific drivers. For example the demand situation in base metals or the dollar devaluation have been 2 easy trends to realise over the past couple of years. In this knowledge it has been easier to sell dollar rallies and buy dips in the base markets than it would have been should the fundamental picture have been less clear.

Although I run some 100% technical systems, I also read a lot of fundamental reports and find this essential as when you want to stay on a trend and ride it for an extended period with a large risk there is no better way to do this that to have confidence that the underlying situation is supportive of your position and you start to see those scary countertrend moves as opportunity rather than frightening prospects.

 

[tommog]

Imagine the scenario where you have 2 groups of traders. One group only technical and one only fundamnetal.

Both these groups trade the FTSE in this example.

The technical group are locked in a room for a year with no news feeds at all they trade purely off technicals.

The fundy group are in a room for a year with no charts at all.

Also these two groups have their own exchange (so fundy order flow wont move the technicians charts and vice versa)

At the end of the year they show each other the price they have arrived at for the FTSE, it would be interesting to see how similar or different it would be.

I predict they would be very different because fundamentals give reason for price move technicals (used correctly) just let you follow the fundamental price flow. Not predict it.

Out of the two groups which of them would be closer to real value? This is a bit of a grey area, what is value? Im defining value in this scenario as the point at which a share price becomes so low that buying a company because the price is so ridiculously low it becomes a bargain. This is a very badly worded way of saying, basically if after this experiment the technical group have decided the price of the FTSE is so low all the companies in the FTSE 100 have become penny shares. You can buy BP for 2p a share despite its current turnover and profit being the same as it is today (fundamental).

I am pretty confident that the fundamental group would reflect a truer price.

Hope this makes sense as i know it became ambiguous at the "value" aspect of this experiment, but i hope you get the jist that there is an inherant value where a price could be so mispriced become almost an arbitrage to buy the company, i.e the cost of buying a company could be recovered in 1 weeks profits.

 

[TheBramble]

TWI - I understand what you're saying in that the outcome of the joint analyses (Fundamental and Technical) is a particular course of action which has a higher probability than using just one or the other, but it still begs the question as to which drives which. Who cares indeed, providing you can profit handsomely, but as we're on the topic, it seems worth persuing.

Do you believe the trend exists because of the fundamentals or that the fundamentals mirror the trend?

An example: Say Uranium-A PLC has been valued highly based on current demand for the base product and estimated medium-term demand. The fundamentals are AAA. Investment floods in and the price of the stock rises. An up trend. Nothing changes in the demand either short or medium term for the base product or in the company’s infrastructure, management, market position etc. Complete status quo (OK, rarely ever the case but, bear with me).

There is perceived (fundamental or technical – we don’t care which here at the moment) massive potential increase in demand for Flubber. So Company Flubber-XYZ looks like a hot buy . Funds and holdings are liquidated in large scale in order to invest in this new area. Part of the liquidation energy will necessarily come from Uranium-A PLC.

So, nothing has changed in the fundamentals of the base product (Uranium) or the company (Uranium-A PLC), yet the share price will begin to decline as holdings are liquidated to invest in what is perceived at a higher grade, faster moving stock and sector. The fundamentalist will reassess their valuation of this company (Uranium-A PLC) based on the decline in the price and the movement of funds away from it and its sector.. It will not have been their reassessment which causes the decline in price, but the change in price which has caused their fundamental reassessment.

 

[Jack o'Clubs]

The fundamentalist will reassess their valuation of this company (Uranium-A PLC) based on the decline in the price and the movement of funds away from it and its sector.. It will not have been their reassessment which causes the decline in price, but the change in price which has caused their fundamental reassessment.

I agree with all of your last post except this final paragraph. If nothing has changed, then the fundamentalist will not reassess the valuation (okay, may reassess it, but won't change it). Because nothing has changed. eg. in my portfolio I have stocks which have gone all over the place - one biotech in particular. It causes me a few grey hairs, but every time the price plummets, I spend a lot of time going through the newsflow, company announcements, speak to a couple of sell-side ex-colleagues who know the management, and make sure that the reason I first bought the stock remains valid. As long as it continues to report results in line with what I'm expecting, and nothing fundamentally changes (ie a big pharma for which it is preparing pipe-line drugs doesn't cancel the relationship) then I sit tight. It is still worth whatever I originally thought it was worth, even if the price is moving around a lot.

A stronger argument is TWI's, IMO. I remember reading an interview with the guy who ran a commodities fund at Tiger Capital, who had done all the fundamental research in the world on demand for palladium, probably knew more about palladium than any other person on the planet and went long big-time in advance of an anticipated surge in demand. He was very proud because three years later, after the price declined a bit and then stabilised, he was proved right. I couldn't help thinking there was a hell of an opportunity cost in having capital tied up for three years doing nothing, when a bit of TA could have given him the signal that his fundamental view was being recognised by the market.

 

[TheBramble]

… I couldn't help thinking there was a hell of an opportunity cost in having capital tied up for three years doing nothing, when a bit of TA could have given him the signal that his fundamental view was being recognised by the market.

Are you serious? A technical analyst would have got in when the market showed there was a reason to get in – the fundamentalist would, in your own words, have capital tied up for 3 years doing nothing before the technicals gave the green light. Isn’t this precisely the relationship I’m suggesting exists?

The fundamental analysis isn’t really worth a light until the technicals breathe life into it. Sure the fundamentals may as TWI states give a longer term view or even a ‘rationale’ for why Company-A is doing what Company-A is doing, but they don’t drive the price action.

I really want to be convinced otherwise and I’ll only hold a view as long as it makes sense to me, but nothing so far has taken me away from my conviction on what the drivers are for price.

 

[TWI]

I do believe strongly in the old adage "trade what you see, not what you think" and I do think that this is a very important part of making and holding on to profit.

I would not like to have to trade without a combination of both fundamentals and technicals however if I had only one or the other I would always go with the technicals because ultimately the measure of whether you win or not is in fact in the money management more than the entry and technicals will at least give a timing edge in entry points and exits. That is different discussion however.

Thiink the Grains are a classic example for this discussion. Look at a wheat chart and you can see what can happen when fundamentals and huge inflows of financial cash combine. The story was kicked off by a fundamental tightness in the World wheat SnD but then when it broke up the technicians got hold of it and a relentless move to all time highs. If you look at the front month contracts and compare them to the cash market now there is a large disparity. If you look at spreads between different wheat grades they have gone bezerk with low quality trading a premium to high quality and maintaining it for months..this is the effect of money driven by tech driven speculation.
Therefore in the greater timeframe fundamentals alwasy win out but in the day to day and week to week price action the tech make the money while the fundies just have PnL swings.

 

[tommog]

Bramble,

The fundamental analysis isn’t really worth a light until the technicals breathe life into it. Sure the fundamentals may as TWI states give a longer term view or even a ‘rationale’ for why Company-A is doing what Company-A is doing, but they don’t drive the price action.

I think this is only the case assuming there are fundamental players that are willing to take the other side of your trade whilst you short a stock for a technical based pull back whilst the fundamentals remain bullish.

Sorry to get all cryptic but I think technical traders are like the little fish that feed off of the grime on the surface of the skin of a whale. The little fish will swim in the direction of the whale until it makes the decision to change direction. And when it does the little fish die in the wave it causes, they are reactionary, the fundamental is the life of the market.

Technical traders are reactionary, we sit there waiting for the market to start to trend, start to reverse, if there were no fundamentals the markets wouldnt move. Hence how quiet the markets are when there are no major fundamental factors in the market. There is no point in having a market if there is no reason for it to move. If i set up a futures contract that represented nothing, it was just a number on a screen with no news, no value, just a number that represented nothing it wouldnt move.

So your quote "The fundamental analysis isn’t really worth a light until the technicals breathe into it" i believe is the other way around.

 

[Jack o'Clubs]

If you distill 'technicals' down to buying/selling pressure driving price, then yes clearly that's what drives price. But that rather diminishes the cause of the buying and selling in the first place. In most cases, and especially so in small- to mid-caps, it is driven by fundamentals. Or put another way, if a market was flat-lining, what provides the initial 'spark' to get a move going if it is not caused by fundamentals?

Take my little biotech, and imagine that rather than being volatile (which is effectively a tussle between the probabilities occurring of the two possible binary outcomes - it either wins big-time or fails), it is flat-lining. What makes it move? Is it someone doing TA on it, or is it the head of pharma research at Goldmans waking up to this little company because the Glaxo CEO mentioned over lunch an interesting trial they were doing for them, pointing his biotech analyst at it, and the resulting 'Buy' note being lunched round the CIty so that every small cap and biotech fund manager in the City feels they need to own a piece? As the move starts, TA is then useful for everyone else to jump in without needing to know if the company develops drugs or real estate. But to suggest it is responsible for the move in the first place (other than the fact that people are buying is driving the price) is incorrect, IMO.

On the other hand - does it matter anyway? I make the bulk of my money through FA (despite the few years I've spent on these boards where I've been trying to refine my TA), and clearly you - and most others on here - do yours through TA. Who is right? Who is wrong? Or are we both right? After all it takes more than one view to make a market...

 

[TheBramble]

Tommog (not so sure I resonate with the whale /small fish analogy, but …) you started this thread with a preconception of ‘how it was’ and there hasn’t been too much one way or the other to convince you, or anyone else holding tightly to their current preconceptions (I know I am to mine!) to think otherwise.

But as far as I can tell, there haven’t been any straight 100% economists or straight 100% Fundamentalists who have responded. A situation I thought would most likely be the case when I PM’d you on this topic.

My point being, given the large membership of this site and given the few that have felt either qualified or inclined to respond, none have been of the 100% straight economist or fundamental persuasion. I sense that is because (personal view) those who are of that ilk do not trade as we trade, if at all. Pure fundamentalists buy companies, not stocks. Economists advise (and then run for cover). In between that lot are the FAs for brokerages, institutions and discretionary brokerages. They are advisers and analysts – not traders.

Of all the independent traders I personally know, there is only one who uses pure 100% fundamental analysis in his decision-making and although not of the Warren Buffet order of magnitude, he does focus his considerable financial clout into just one company at a time and for a period of years, not months, not days and certainly not intraday.

To answer your question through what I am fairly certain is his perspective (I haven’t asked him, but will), technical analysts neither impact no concern him – they are looking at it their way.

The only other thing I would address tommog is in your initial post on this thread your contention that technical boys & girls will ‘often [go] against the overall fundamental picture’. I’m sure some perhaps many, do trade against the primary trend and that can work well in the shorter timefreames if the intermediate and short term are both going against the primary. But in no way invalidates the use of technical analysis. In many ways, this underlines the important benefits of TA over FA in the timeframes that are likely to be of most interest to those on these boards.

I’m wondering if the differentiation between the two disciplines, apart form the superficial approach and tools used, is simply a matter of timeframe?

 

[TheBramble]

On the other hand - does it matter anyway? I make the bulk of my money through FA (despite the few years I've spent on these boards where I've been trying to refine my TA), and clearly you - and most others on here - do yours through TA. Who is right? Who is wrong? Or are we both right? After all it takes more than one view to make a market...

Absolutely agree and stated so above (I think). Providing we make profit doing it, does it matter? No. But I do find it useful to get the 'other' view as I'm happy to take anything on board that improves my ratios.

Before I get branded as an arch-technician, as I’ve outlined in some depth in other threads, my approach to market analysis covers a broad range of instruments, sectors and markets. Although a died-in-the-wool Fundie would consider my analysis of Bonds, Dollar, Gold, Oil, Other commods and Interest Rates rather cursory, for many, the thought of going anywhere other than the tick, or maybe the 1 min at a push would be an exercise in futility.

So put me just a tad to the left of that right-most marker of the total technician on the FA-TA scale.

 

[barjon]

Imagine a scenario where companies stopped paying dividends and were precluded by inviolable law from ever doing so. There would be no market.

It follows that the primary driving force is the dividend stream and peoples' perception of how that might change in the future. One way or another, fundamentalists are analysing that dividend stream to make their decisions whilst technicians are analysing peoples' perceptions to make theirs.

good trading by whatever route

jon

 

[egro1egro]

An interesting discussion we have here...
The main assumption of this thread is not quite true - economists do not ignore technical traders and they are well aware of their existence. If you take a book on "Market Microstructure" you'll find that the economists regard technical traders mostly as parasytes. Their classical approach to trading and assets value in short can be summarised as follows.
Every asset/instrument has it's fundamental value which has to be distinguished from it's "true" value. Fundamental value is a price to which market would momentarily come if every market participant had all the information. Such information that can affect market price forcing it to converge to the fundamental value is called material information. Difference between gambling and trading financial instruments can be stated in a way that the financials ultimately converge to their fundamental value once the material information is uncovered. The market as a whole is populated by informed traders and uninformed ones. Informed traders force the price to converge to its fundamental value. Uninformed traders only create market noise (it includes hedgers and utilitarian traders, like steel importers, or tourists when they convert currency).
Now about the famous "markets can stay irrational longer then you can stay solvent".
If material information is distributed frequently and fairly then, according to the theory, big swings of price away from the fundamental value should not occur very often or very large😆 And if it happens then mean reversion will unavoidably follow. Regulators therefore should promote good information distribution in order to avoid unfair prices, booms and crashes. Yes, this is the same theory that says markets are efficient. But anyway.
Informed traders are either aware of the fundamental assets values (value traders) or learn about it through price discrepancies (arbs). One more category of informed traders - technical value-oriented traders who try to learn about the fundamental value by recognising patterns of value traders behaviour. As the professional value traders progress they change their patterns and so have to change their tactics the technical traders.
Uninformed traders very often do not derive any profits from the instrument. They use it for their utilitarian purposes (to hedge, to supply, to study markets etc..). But uninformed traders do also include a sort of technical traders for profit - technical sentiment-oriented traders, who do not try to learn fundamental values but rather steal liquidity when crowds move in the same direction. Their main tool - entry stop orders.
To sum up, technical traders are mostly not bringing any liquidity or information into the common marketplace. They also do not influence much the price and economy as a whole. Price is influenced by material information (i.e. fundamentals) and if it is affected by technical or other reasons - then not for a long. That is the official theory.

 

[Splitlink]

I agree with Jack o'Clubs on FA for portfolio management. I would never buy a share that had ( what I considered to be) bad figures. At the same time , I would never buy a share that had good figures if its price was dropping. I've got a few on my "watch" list, already, but TA says "leave them alone, for the present". Where I do not use FA, at all, is when I am trading FT100 shares on a swing basis. I don't think that with those shares that go up and down on a daily, or weekly, basis FA comes into it. Let's face it, I could not see anything right or wrong with Northern Rock, or any bank shares because they do not publish figures that make any sense to me. I like companies that sell things.
They are making good sales, or not. If they are making good sales, what are the prospects? What are they doing with the profits? What is the ROC? There are all sorts of hints about whether it is going to be there, making increasing profits, in the next few years. That is the type of company you need to invest in while you are sweating away on TA trading!

Split

 

[TheBramble]

Imagine a scenario where companies stopped paying dividends and were precluded by inviolable law from ever doing so. There would be no market.

It follows that the primary driving force is the dividend stream and peoples' perception of how that might change in the future. One way or another, fundamentalists are analysing that dividend stream to make their decisions whilst technicians are analysing peoples' perceptions to make theirs.

good trading by whatever route

jon

Fundamentalists don't dig capital growth?

 

[barjon]

Fundamentalists don't dig capital growth?

Yes, that's why I said "one way or another" - in the end capital growth only comes from an increased dividend stream or the prospect of it.

cheers

jon

 

[TheBramble]

That is the official theory.

But does that match your experience?

 

[TheBramble]

Yes, that's why I said "one way or another" - in the end capital growth only comes from an increased dividend stream or the prospect of it.

Capital growth (the increasing value of your stock) is independent of dividends. Dividend is income.

 

[tommog]

Tommog (not so sure I resonate with the whale /small fish analogy, but …) you started this thread with a preconception of ‘how it was’ and there hasn’t been too much one way or the other to convince you, or anyone else holding tightly to their current preconceptions (I know I am to mine!) to think otherwise.

Appreciate the comments. But i am actually an entirely technical trader in fact maybe the most technical of technical in the sense i trade black box systems professionally. I use no discretion or personal opinion.
I am just playing devils advocate for the purpose of this thread. I make money by analysing when the market is moving in a particular fashion and exploiting that. But i believe the only reason why the market moves in that fashion is because fundamentals are a catalyst for "smart money" to start exploiting the fundamental situation i.e interest rates rise so people buy that currency which causes a rise in a dollar which causes my system to buy the dollar.

However i don't believe my approach to trading is anything more than a nusance to the market in the greater scheme of things. If everyone had my approach to trading the markets would be meaningless as i just react to price, without caring why its moving. Traders like me just exagerate fundamental moves. But i believe without fundamentals moving the market for me traders like me wouldnt exist. I think by realising the fundamental picture you can start moving into a position and the technical guys strat to follow as i believe they are reactionary and come second to fundamentals.

 

[barjon]

Capital growth (the increasing value of your stock) is independent of dividends. Dividend is income.

Absolutely but, like bond prices, it is ultimately driven by the income to be derived. Mostly that's via dividends but there is the element of distribution of capital assets via break-up or takeover etc which I've ignored to focus on the kernel.

jon