Technical Analysis vs Fundamental Analysis? Which is better/ handier?

Technical analysis as its name suggests refers to that where individuals decide or determine action(s) based on chart patterns. It can be mountain chart, candlestick patterns or simply based upon the price. For actions based on price, I wonder if readers have come across this phrase called “Average True Range (ATR)”. It saves your time immensely in noting or monitoring the price volatility as one can simply anticipate the average price volatility based on the ATR indicator on your charting platform. Of course, there are much more in technical analysis, and this is just one of the many few.

On the other hand, fundamental analysis has everything to do with the underlying company. Investor can access the company based on their quarterly financial reporting. From there, the cash flow statement, balance sheet and income statement provide important information of how the company is performing. Is the subject company undervalued, overvalued or is it fairly valued based on its current price? The answers can only be determined through investors own due diligence and their method to calculate the intrinsic value of the company. The stock market is bounded by irrationality as majority of investors and traders invest/trade with the component of emotions. Not to forget there are institutional traders who holds a substantial power in affecting the stock price’s movements. For example, Citigroup admits that “trader error caused Europe stock markets’ flash crash”. Also, there are algorithmic bots who make buy/sell decisions based on pre-set coded formulas. Therefore, fundamental analysis plays a pivotal role in setting investors/traders mentality right so that they stay calm and rational during their portfolios’ downtimes.

(Source: CNBC 2022)

Now that we have a rough idea on technical and fundamental analysis, the question lies in whether which is handier? For me personally, I would give an 80% weightage to technical and 20% to fundamental as my style of play focuses more on the thrill and satisfaction from making short-term profits through swing trading. Nevertheless, 90% of the time, the stocks that I swing traded are companies who have solid fundamentals, hence comes the 20% weightage. Also, I only use margin/ leverage on indexes, so at times for some fundamentally strong stocks which I deemed to have upside potential at the next wave, I will turn them into temporary mid-term investments rather than taking profits or cutting losses. Of course, in a trade, stringent discipline needs to be practiced in order to prevent oneself from getting “burnt”.

A picture speaks a thousand words so let us look into the trade below which I had executed and subsequently kept as “temporary mid-term investments”:

I bought at point 2, in anticipation of a double-bottom stop out pattern (bullish signal) and looking to take profit at my TP point in chart. However, the upward momentum stalled at point 3, and subsequently retraced back to point 4. Based upon the smaller mountain formed in point 5, we have two bearish signals: Lower highs + head & shoulder pattern. Theoretically, I am supposed to sell the stock I bought previously to prevent further downside risks. However, I have huge faith in Amazon Inc! Despite slower e-commerce growth, their Amazon Web Services (AWS) business segment is growing at a meteoric pace. Huge growth potential can be expected as the world is embracing digital revolution. Not only that, my other reason of not selling but rather may look into adding more at point 6 is because of the anticipation of a reverse in the downward movement. Currently, Amazon stock sits in my portfolio of “mid-term investments”, but there’s possibility of cutting loss if it goes below the support price level of 102 by 10%. That brings my P&L % for this trade by -10%, which is an “affordable bet”.

(Source: Amazon Q1,22 Quarter Report)

From what I have shared above, it is obvious technical analysis comes in handy and is more relevant to my trading and investing journey. But these analyses vary from person to person, so it is best that individual investor/trader find one that suits them. If time is a luxury, then fundamental analyses would be a more suitable fit as investor just purchase when the underlying stock is undervalued and continue adding as long as it fits their investment plan. I will talk about Dollar-Cost-Average (DCA) strategy in the next blog post so keep a lookout!

ALTERNATIVELY, my basic and platinum memberships are available to subscribe at: https://www.gavinchiuinvest.com/plans-pricing