Think Like A Fundamentalist Trade Like A Technician – Combining Both Methods’ Advantages

by Olivier on January 17, 2010

Today I want to address an issue many have asked me about in the past. They have a background as a fundamental trader and are discovering the benefits of applying or at least incorporating technical analysis into their trading decisions. The reasons are manifold. A few that come to mind are ‘fundamentally sound’ trades that didn’t work out, the desire to improve performance and the need to improve timing.

I consider myself a technical trader but I do lots of research in the background which also makes me a full-time researcher. I wouldn’t say the non-technical stuff I look for fits the fundamental approach description. I typically am interested in analyzing a trading opportunity from the psychological perspective. I need to know the market capitalization of a company, the country it is operating in and the people running the company. Then I basically try to gauge the price appreciation potential which is highly correlated with the stock’s potential to develop into a ‘story stock’. There is much more to it but for the sake of brevity I’ll leave it at that.

So what to do if you have a background as a fundamental trader, want to improve your results but somehow doubt technical analysis? My recommendation in that case has always been the following: You need to find a way to trade that suits your personality. A stock’s personality needs to match your own. The same applies to the way you trade. The approach you use needs to suit your personality as well. Otherwise you won’t trust your method. This will make trading without hesitation impossible.

The solution is simple: Combine both methods. Make a decision regarding the number of stocks you want to hold when fully invested. Then select potential candidates using fundamental aspects exclusively. Assuming you go for a portfolio comprising 10 stocks I would build a pool of 20 – 25 stocks which you would be willing to own based on the fundamental criteria you applied. Now comes the hard part. Forget everything you ‘know’ about these stocks. Going forward strictly stick to technical aspects when it comes to initiating and closing positions.

Some great traders have devised trading rules that are dealing with this topic. The trading maxim I am referring to is part of Dennis Gartman’s Trading Rules.

Rule Number 10: To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then, and only then, can we or should we, trade.

A similar rule is the famous “trade what you see not what you think”. The essence of both rules is to eliminate hope and to objectively analyze a chart’s message. Simply apply discipline with your entries and exits. Then you repeat the process over and over. The ultimate stage a trader can reach is when trading itself becomes boring. You know what you are doing and you know the odds of specific patterns. You have then reached a stage where you execute trades and are emotionally detached. A stock then is reduced to its ticker symbol.

Everything that we see is a shadow cast by that which we do not see.
- Martin Luther King Jr. -

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