Fundamental vs. Technical Analysis

[ep510]

What percentage of the market are in each category (fundamental vs. technical)?

Also, I got this from investopedia:
"Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts."

Doesn't that argument rely on the assumption that the majority of the market consists of fundamental investors that will discount the effects of news and fundamentals into the price? Hypothetically speaking, if the majority of the market were driven by technical analysis, wouldn't that argument be worthless?

[pig4bill]

You don't need a majority of any type to move a stock. Sometimes one person can do it.

[RedJoker]

[ QUOTE ]
Hypothetically speaking, if the majority of the market were driven by technical analysis, wouldn't that argument be worthless?

[/ QUOTE ]

Then the self fulfilling prophecy would kick in. So although the argument might be worthless, technical analysis would still work.

[wpr101]

The best approach would be to use them both in conjunction.

[gull]

The best approach would be to use neither of them, preventing your capital from being eaten away by commissions and spreads.

[yellowbastard]

I think investopedia is referring to the "strong, semi-strong, and weak" forms of the efficient markets hypothesis. Investors who believe that stock prices accurately reflect all relevant information about the firm believe in the "strong form" of the EMH. Investors who believe stock prices hardly ever reflect relevant information about the firm believe in the "weak form" of the EMH.

Technical analysts will use 100 day moving averages and stuff to try to find buy and sell signals in price trends. Fundamental analysts, on the other hand, will study the fundamentals of the company to try to find good buys.

To answer your question [ QUOTE ]
Hypothetically speaking, if the majority of the market were driven by technical analysis, wouldn't that argument be worthless?

[/ QUOTE ]

Yes it would but technical analysts believe market prices to be driven by all relevant fundamental information...because that's what makes them technical analysts.

[pig4bill]

[ QUOTE ]
Hypothetically speaking, if the majority of the market were driven by technical analysis, wouldn't that argument be worthless?

[/ QUOTE ]

No, because ask 5 T/A mavens to analyze a stock and you'll get 6 different answers. Some look at different timeframes, some look at patterns, some use different combinations of the more than 50 common indicators available.

[Sniper]

[ QUOTE ]
"Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts."

Doesn't that argument rely on the assumption that the majority of the market consists of fundamental investors that will discount the effects of news and fundamentals into the price? Hypothetically speaking, if the majority of the market were driven by technical analysis, wouldn't that argument be worthless?

[/ QUOTE ]

No... There is a large difference between "the chart" telling the story and any action taken by a fundamental investor.

A technical trader is concerned with the supply/demand balance in the market at any given time over the timeframe they are looking at and trading in. At its core, a technical trader believes that they can determine (or at least put the odds in their favor) the supply/demand balance (which ultimately determines stock price movement), based on (in its simplest form) current & past changes in price (and volume), regardless of why there are more buyers than sellers or vica versa.

[RedJoker]

[ QUOTE ]
Technical analysts will use 100 day moving averages and stuff to try to find buy and sell signals in price trends.

[/ QUOTE ]

I take it you don't use technical analysis so.

[ QUOTE ]
No, because ask 5 T/A mavens to analyze a stock and you'll get 6 different answers. Some look at different timeframes, some look at patterns, some use different combinations of the more than 50 common indicators available.

[/ QUOTE ]

An example of how different opinions can be drawn from the same chart would be The HUN's Options Recommendations

In those 50 indicators you can also choose different time periods, e.g. stochastics can be fast or slow moving, have a huge range of possible time periods, and can have different length moving averages. There is also different ways to use them. A signal could be given by the stochastic crossing up through the 20 line, crossing above it's moving average, or having a fast moving stochastic cross up through a slow moving one.

Even something as simple as a moving average of price can be used in a few different ways.

There are a few reasons for different opinions.

1) Charts can be ambiguous. It's a lot like using the correct discount factor and analyzing the correct quantitative ratios in fundamental analysis. A lot of it is open to interpretation.

2) People have different horizons and different goals. For a day trader to look at weekly charts would be a waste of time. Some people won't use a particular indicator because they might not put much emphasis on it or they might not be comfortable trading with it or in that particular style.
E.g. I don't put any emphasis on the 200 or 100 day MA because I don't find it useful and it doesn't suit my style of trading.