Why Technical Indicators

Al Thomas
 


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The fight continues to rage among traders who use technical indicators and those who prefer fundamental information to establish new positions and to exit current positions.

The fundamentalist believe in knowing all the facts about a company such as price earnings ratios, sales growth, product margins, management capabilities, cost of production, cash flow, etc. , etc. while the technicians could care less about the latter and want to see sector price trends and rank, the Relative Strength Index, MACD (moving average convergence divergence), stochastics, trend lines, chart patterns and many more esoterically evolved indicators.

Which method is the best?

There is no Holy Grail of trading and what critics of either method forget that it is the trader who adds the final nuance that results in profit or loss. The more years a professional investor has been working his plan the more successful he usually becomes. The unsuccessful ones have long since gone broke and are no longer in the game.

It is somewhat difficult for me to give great credence to fundamentalists as I am a technician and have a very long profitable track record to prove it; however, I do sometimes look at some of fundamentals. It seems that the longer term trader can do well with a fundamental approach because the timing to buy or sell has a lag time. He does not buy the bottom nor sell the top, but who does?

The technical trader will ignore the informational approach with the use of charts and other indicators. Short term traders must be technicians, especially day traders, as there are no fundamentals upon which they can assess their buys and sells.

Technical trading is based on the psychology of the mass of traders that ride upon the hidden values of the changing fundamentals. Charts and other indicators tell the of the long term health of a company, country or commodity as it is shown in the price action. The fundamentalist looks for the reason for a change to buy or sell whereas the technician tries to find the change in the price action to initiate buys and sells.

No matter what a fundamental trader’s position he must be very patient. He may have a position on for years. During that same period there will be waves of highs and lows during which he remains constant in his position. The technician may trade the same equity several times buying the low of the wave and selling the high (hopefully). In commodities it is astute trading, but when it is done in stocks and funds it is called timing.

A combination of technical and fundamental methods can give the best results. For the average guy occasional trader I can only caution him to be very careful. Very few intermittent traders ever make money.

A successful trading approach requires commitment. It is a business the same as owning a shoe store or trucking company. You must give it your all.

Like any business you have to work at it.

Al Thomas’ book, “If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.

Copyright 2005

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