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Technical Price Action vs Fundamentals and the Strategy for YOU? Ep 45

In this post, we’re going to talk about this week’s question and technical indicators, technical analysis, and fundamentals.

Here’s the question:

“Hi, my name is Jared. I have a question about price action vs. indicators. I’ve heard a lot recently about how indicators are dead, and it worked well in the 90s. But today it’s all done with price action and a lot of fundamental trading.

I was just wondering your take on that because I’ve tried technical trading up to this point for about nine months. 

And I’ve had some success, but overall it’s steadily going downhill. And I just wanted your take. 

Thanks”

Let me give you my insight.

First Things First

Before we even get into the answer the question, you have to remember that often when you’re hunting and searching for an answer, you’re saying you hear a lot of things. That goes with anybody who’s studying and learning things.

You have to be very cautious about the things you’re learning. That’s the case, especially when you’re new, and you’re getting started. When you say that you hear these things, it means that you’re searching for reconfirming your ideas and beliefs.

You might be hearing those things. Things aren’t working out in trading, and then you again try to find validation for those things.

Wherever you hear those things, take a step back and understand what is it that you hear new and what is different. How does it apply overall to the bigger picture?

How do you take a step out of it to see it for itself without getting clouded by what’s going on in your personal trading.

Fundamentals have always worked. Fundamentals are the key. That is based on what you’re telling me (based on my notes). Price actions versus indicators and that indicators are dead.

Technicals and Fundamentals Explained

Typically stocks with great fundamentals are going to have excellent price action or great indicators. Stocks with great technicals are going to usually have exceptional fundamentals.

They work hand in hand. You have a stock that’s great chart – it’s going to have great fundamentals. If you have a stock with great fundamentals – it’s going to have a great chart. If it’s the other way around and if it has bad fundamentals, probably it’s going to have a bad chart. If it has bad technicals, it’s probably going to have bad fundamentals.

In certain rare cases, this does not happen. That’s the case with crooked companies.

In those cases, fundamentals and technicals won’t go hand in hand. But often technicals and fundamentals, they go hand in hand. The difference is that fundamental data they’re looking way longer out in terms.

You’re investing way out longer in terms. The question is, if you’re investing way out longer in terms, are you doing the same thing with your technicals?

Are you looking at the technical charts every month versus maybe like a weekly or daily basis? And are you holding and doing the positions and those same concepts. That’s what most people don’t do in the same approach. That’s because, with the big business (you’re talking about multi-million to billion-dollar companies), it takes a long time for that ship to turn.

If they need to change their angle and direction, it takes multiple years for them to change production lines, marketing tactics, and so on.

You have to be understanding of these things. Fundamentals that’s how they work. It is for the long term. Technicals can work in the short term. If a stock is in a panic mode, fundamentals go out the door. People are selling in a panic. They’re emotional. But typically, they go hand in hand.

You could pick any stock, and it doesn’t matter. Stocks that have great fundamental data (look at Nvidia), probably had good fundamental data here.

The minute that breaks down, it all catches up. Price is too high for where it is, so they always lag a little bit one hand. But they typically average out with time to be similar to fundamentals and technicals.

Price Actions versus Indicators

When you look at price action versus indicators, if that’s the big question.

You can pick any stock you want. It doesn’t matter.

Price action when you’re looking at charts, you’re looking at the price. First, you have to define what is price action. For me, I look at a couple of things when I do price action.

I’ll share it from my perspective. When I look at price action, I’m looking at the price. Also, I’m looking at action – how is it moving. Is it moving strong?

  • Is it moving weak?
  • How do you determine that?

This is Part B.  

Well, look at price action in the sense of how big is the bar.

  • Is that bar big, or is that bar small?

Then you look at overall the behavior – the pattern. 

There are three things:

  1. Price
  2. Action and 
  3. Behavior 

Now you look at the chart patterns themselves. All of that, you can get indicators from mostly. 

How do These Indicators Come About? 

Well, let’s take the moving average. If I get rid of that, do you think I could get an idea of how that line is probably drawn?

Yeah, more than likely. That’s because what am I doing? I’m averaging these prices.

Generally, if you’re trying to do it manually, you need to zoom back out. But you get an idea. It’s not going to be perfect because I’m not mathematically calculating it. But you get an idea of what it’s drawn.

Stochastic Calculation for Stocks

How do you calculate it?

The definition is the moving average bound by units.

Here it is.

You have:

  • the most recent closing price
  • the lowest price traded 
  • the highest price 
  • the current value of the stochastic indicator 

You basically have price action.

The Most Common Mistake

I think what people do wrong is they put too much emphasis on the indicator themselves, and they don’t look at the overall chart itself.

That’s one of the bigger problems that most people have. They put so much emphasis on these indicators, but they’re lagging where the price is more leading.

That’s because it happens in real-time, whereas these other indicators are a little behind.

People put so much emphasis on it that they believe it’s going to give a signal, and they will know if it’s strong or weak. But beyond that, they don’t even have a trading plan. They don’t even have a money management strategy. And all those things work together to create a successful trade.

Key Point: If you work with fundamental analysis and if you’re trying to compare that to technicals – usually hand-in-hand stocks with great technicals are going to have great fundamentals.

Stocks with great fundamentals are going to have great technicals. Sometimes they don’t line up with companies like Wells Fargo. That’s because they cook the books maybe. Or other times, when people are in a panic, they sell-off. They sell off because of emotional reasons. Otherwise, most of those other indicators they can cloud your judgment. That can happen if you don’t use them correctly.

I don’t show my charts with RSI or the ADX or the PPO, which I probably look at maybe three times a month. But other than that, I don’t give that much emphasis to these indicators. And I never have because you can get it mentally if you’re looking at the price itself. Yeah, you could say that’s the price action.

But those indicators they’re just drivers from the price action. 

And from the way that I define it:

  • the price 
  • the action and 
  • the behavior (chart pattern)

That’s how I would look at it. But I wouldn’t say that they’re entirely dead because now you’re saying maybe the moving average is dead. That’s also considered as an indicator in a simple way. Instead, I would look at it how do I use these things to help my trading, concepts, strategy, and my plan.

I don’t like to eliminate myself from any one thing. If I’m listening to someone give a speech, talking, educating, I like to think about what is new and different in that what I hear. How can I use this to my benefit?

You always want to go in with an open mind so that way you can evolve yourself personally.

Key Takeaways

Fundamentals are great – they’re more for longer-term. Technicals are more if you’re trading less than let’s say 90 days. Even less than one-year holding time. But otherwise fundamentals they’ll usually pan out and work out.

If you look at stocks like Walmart, you can see that with time, they will continue to grow because of dividends and just natural price inflation. That’s just the nature of prices. They keep going up whether you buy a car ten years ago or now. It’s going to be more expensive just because prices keep going up; the value of the dollar keeps decreasing in a sense.

A hamburger it’s going to cost you $1-$2. Some burgers cost $20-$50. But in the past, it might be just 10-20 cents, back in the 1920s. That’s just the nature of price movements.

Look at it how you can benefit yourself personally from using this as a tool. Technicals and fundamentals they’re all just tools. And see how you can use it. Some people can use wire, and they can make a piece of art. Other people use wire to wire their houses.

You can use them differently in different ways, depending on your needs. Keep an open mind and see how you can benefit from them. If you’re not putting the puzzle pieces together, if it’s not working for you to trade off technicals, then go to fundamentals. It’s perfectly okay. It’s just a different strategy.

If you’re dating someone and that relationship doesn’t work, but then that person ends up marrying someone else – that’s fine.

It’s great for them. It just wasn’t a match or a fit for you. Same thing here. If technicals aren’t working for you and it doesn’t match for you, that’s fine. Don’t keep pushing it. Try something new. But of course, don’t give up too early. You want to put the effort and energy behind it.

It’s just a tool. Use it to continue to get better and evolve. And if fundamentals work for you, stick to fundamentals. If technicals work for you, stick to technicals. Whatever the case is. 

Final Word

As I mentioned typically, I wouldn’t say technicals are dead. I wouldn’t say indicators are dead.

I would say that it might not be the right fit for you, your personality, and your risk tolerance.

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