Making Money In The Stock Market Using Stock Charts Or Fundamentals

This argument has been going on for quite a while with many hostile words exchanged between traders who follow the different methods. I find myself siding with the technical traders who rely on the charts to tell them when something will be a profitable trade.

It’s not just about Fundamentals

One thing that drives me absolutely crazy about the market fundamentalists is that they always seem to ignore market sentiment. By sentiment, I mean the general investing public’s opinion about whether the overall market is underpriced, over priced or somewhere in between. Investor sentiment plays a major-major- major factor in whether the market moves up or down.

When you watch the television analysts on stations like CNBC, they never mention this fact. All you hear out of these so called experts (who usually underperform the indexes by the way) is about how the fundamentals of a company are weak or strong. They base their investment decision on whether or not the underlying fundamentals of the company are sound. As far as I am concerned, that is fine if you are buying utilities or other slow moving stocks strictly based on the dividend they pay. But, if you are looking for price appreciation in a stock, then fundamentals are only half the driving factor of the stock’s price.

The other huge factor is investor sentiment about the overall market, investor sentiment about that stock’s particular industry and overall sentiment about that particular stock. There are many other smaller factors involve also. So, in my humble opinion, if you base your decision on fundamentals alone, you will be wrong a great deal of the time. Your timing will be mediocre at best. The professionals refer to this as being too early. What a joke. That is their lame ass explanation for being really bad at their jobs.

Should you rely solely on stock charts?

You can if you want. I often do. There have been countless times when I have made a trade based on a chart pattern alone. Why you might ask? The reason why is because my experience with trading has taught me that certain chart patterns and setups are extremely accurate. They are high percentage trades. That is where I have made some really big money.

Do I know and understand why the stock is behaving like it is? Nope. Do I care? Nope. Why should I care why a stock is moving in one direction or another? Who cares? I just want to know which direction it is moving in so I can get in front of it. All the rest is simply immaterial. Who cares?

How can you trust charts so blindly like that?

Well you see, I am a firm believer in the hypothesis that the stock chart accurately reflects all relevant factors in determining a stock’s price. It perfectly reflects investor sentiment, company fundamentals and every other minute detail that goes into determining a stock price. It must reflect them. They are all involved in determining the stock’s price right at this moment. If there is insider buying, it is reflected in the price. If there is heavy institutional selling, it is also reflected in the price. It shows the sum total of all supply and demand in the stock at that moment in time. What is not shown in the price is all of the factors that will affect tomorrow’s price.
So, you’ve got a choice. You can either look at what a stock is doing right now (the charts) or you can read all about the company’s fundamentals and try to guess what it is going to do, when it is going to do it and why. Which one seems easier and more accurate to you? Isn’t the answer obvious?

Ask a stock broker about my opinion and he will give you a giant pile of bullshit salesmanship about how fundamentals an earnings are all that matter. The obvious rebuttal is, if their fundamental way of investing in stocks is so damn accurate, then why the hell do 80% of them fail to beat the S&P 500? Seems a little fishy, huh?

Charts don’t lie.

How come everyone doesn’t just trade with charts then?

For starters, most people can’t place their trust in a mathematical and statistical system of reading charts that they don’t understand. That is what trading with charts is all about. You can see which way a stock is trending. You can see where support and resistance should appear. Yet, you can’t explain the underlying reasons why they are there. You just know they are.

Some hard core technical analysts have tried to explain the underlying investor sentiment, emotions and fundamentals represented in certain chart patterns. Maybe they are right. Maybe they are just trying to satisfy that burning desire to understand what the charts mean. I don’t care what they mean. All I care about is what the stock is going to do.

As with every other method of trading and investing chart patterns aren’t perfectly reliable. Because of this, people will write them off as voodoo. Not all chart patterns work in all situations. There are certain situations where certain chart patterns are extremely reliable. This is what you need to learn for yourself. If you can learn what patterns work in what situations, you can become an extremely profitable trader. All of that knowledge and wisdom comes with experience and persistence.

Why not use both charts and fundamentals?

You can if you want to. In fact, that is probably the most sane and most logical approach to take. I know a professional hedge fund manager who uses fundamental analysis to determine what sectors and companies he wants to invest in. Then he uses the point and figure charts to tell him when to buy or when to sell. He is a very wealthy man.

My own methods are really a combination of the two. I admit that I sometimes use fundamental analysis to screen a list of stocks. I then look at the chart patterns for those stocks. I am searching for certain recognizable chart patterns that I think would be reliable in that situation. My own personal philosophy is to just do what works. I am constantly looking to hone my skills. I am always open to new ideas about finding highly probable and highly profitable trades.

The difference between me and the typical stock broker is that I don’t pretend to know and understand everything about a company. I don’t pretend to be smarter than anyone else nor do I need to convince anyone that I am smarter in order to earn a living. I simply do what works. If it works, I’ll do it again. If it doesn’t work, I’ll either throw it out or tweak it and try it slightly differently next time.

My take on most money managers is that if they were truly excellent traders, they would be trading their own multi-million dollar account and would not need your money. Anyone who can consistently earn 25% annual returns can turn a decent sized investment account into millions in a relatively short period of time. Do the math. Compound interest is amazingly powerful.