Was listening to this interview with “The Jack Schwager” from sometime back.
An interesting answer from Jack to my question.
Nithin: I’ve heard about your transition from being a fundamental trader to become a discretionary technical trader because of all the risk management benefits you got from following technical analysis. Can you talk a bit about this?
Jack Schwager: It’s kind of interesting. I am not pushing anything but I’ve interviewed traders who made millions or hundreds of millions on fundamentals so I am not knocking fundamentals and it’s right for certain kind of people. I’ve seen both kinds, traders who have done tremendously well with fundamentals and traders who done phenomenally well with technical.
But for myself, the problem I always had with fundamentals is that inherently in the approach, the more wrong you are the more sense it makes to add to the position. So, if I think that some market is underpriced let’s say at $6 and I go long because my fundamentals tell me that this is cheap. If this goes to $5.50 and nothing has changed then it logically means that it is an even better deal and that I should buy more and to certainly not get out.
Not only does fundamentals not have any intrinsic risk management, it’s inherently anti-risk management. Because if you are trying to assign a value to an item and if it is going against with any change and I emphasize without any change in the facts as a fundamental trader your logical step would be to add to a losing position.
This, from a risk management perspective, isn’t very good. Whereas in technical if you are going with the trend or even against a trend I can say that I can expect the market to fail in this zone and if it goes beyond the zone by a 100 points then my call is wrong and I am out. Even if you are going with or against the trend you can apply risk management because technical analysis establishes an area where you want to either buy or sell.
Any reasonable approach you have should allow for asking the question “Where am I wrong?” and that allows for placing a risk management stop. Whereas in fundamentals the market going against you is not a sign that you are wrong but rather a sign that you should put on more.
So, that’s the crux of why I completely transitioned away from fundamentals but again I’ve interviewed many people who think that technical analysis is a bunch of malarkey and have done tremendously well on fundamentals. So it’s really about what’s right for you.
It will be interesting to hear what everyone here think works better.
- Technical Analysis
- Fundamental Analysis
- Something else