I got interested in the stock market a while ago and have always seen a lot of controversy about TA and FA. I have personally used FA in the past and have found decent success with it, haven’t been giving back 30% every year like Peter Lynch, but have made decent money over the years. I use FA, but because there has been so much controversy about TA, I have researched it and even used it in market simulators in the past. I am going to share with you what I have found using both methods trying to avoid bias towards either one.
Explaining both methods
Technical analysis uses chart patterns and indicators that attempt to predict the direction a stock might take in the future. TA is usually a 2-8 day trade) or a short-term trade (2-6 weeks). TA also assumes supply and demand, liquidity or volatility, and a somewhat valued price. Fundamental analysis tries to predict the direction of a stock based on the company’s financial statistics. They are usually long-term operations or investments.
they both work
Yes, I think both methods work. The financial statistics of a company are closely related to the price of a share. When a company produces good earnings and revenue, the stock price will go up. Momentum exists in the stock market, generating patterns and indicators that read momentum as an accurate way to predict short-term price movement.
Which is better
FA is better for larger accounts and risk avoiders. TA is better for smaller accounts and risk takers. The reason for this is that TA is a faster and riskier way to make money while FA is a slower and less risky way to make money. This is due to the volatility of the shares at TA. Large high-risk accounts will probably make the owner shit their pants, even if they are making good money at the moment. Small high risk accounts aren’t too bad because it won’t be death to you if you lose it all, especially if you’re pumping brass. In prosperous markets like the one we are in now, TA is probably a better choice because you are less likely to have losing trades and the volatility of stocks on TA makes for big winners. In average or poor markets, FA is a better choice because volatility in TA creates big losses on losing trades, while losses in FA will likely follow the market.
Counterarguments
Many people argue that there are not many successful technical analysts that the average citizen has ever heard of, while there are billionaires who use FA like Warren Buffet. I don’t think this is an automatic proof that it doesn’t work or has no significant value. As I said earlier, TA trades liquid and volatile stocks, these stocks are usually very small which means you can’t invest that much money in them without drastically changing the price. This makes it very difficult for rich people to use TA and produce exponential returns. Even if someone used TA and was very successful, once they reach the 10-20 million range they will probably move on to fundamental analysis where there are many more stocks to choose from due to the redundant need for volatility. Another reason a successful technical analyst is probably not known to everyone is because he uses systems. A TA system is a system that someone can make that will use TA indicators and tell you exactly when to enter and exit a trade based on those indicators. Once these systems are done, they are so simple that many people have programs and robots that exchange them using the system. Now, if someone were to create a system that printed money directly, they probably wouldn’t want anyone to get their hands on it because it would be so easy to use that anyone could do it. Too many people using the same system will reduce its effectiveness, so good technical analysts are likely to be very secretive about their work.
Why do people say that one or the other doesn’t work?
People who say one or the other doesn’t work either haven’t tried the other or have tried it but haven’t done it correctly. I’ve seen many articles saying that TA doesn’t work or FA doesn’t work, but they don’t even know what it is or how people trade using it.
conclusion
Both FA and TA work, and as long as you understand the concept, you’ll be successful with either.
- FA is better for wealthier people with larger accounts.
- TA is better for smaller accounts.
- TA will perform very poorly in bad markets.