Hi all – What technical indicators do you use to supplement your fundamental investing style? In particular, if you are using moving averages, do you prefer simple or exponential, what is the time period that you use, and why? Can you provide an example where you’ve made an investment decision using these technical tools?
If you don’t use any technicals to supplement your buy/sell decisions, can you please explain why?
I’m just curious since there’s naturally there’s a lot of talk centered around fundamental analysis here, but a relative dearth of discussion regarding the use of technical analysis to supplement (or complement) fundamental investing ideas.
I dont use technical indicators. I aim for very long term holding periods (10+ years), so short term patterns are not typically meaningful as being broadly right.
I don’t think there’s anything wrong with TA broadly, but I don’t think it’s that applicable for things like equities which can be valued on cash flows, while being the de rigeur way for analyzing other securities like commodities.
Interesting observation. Personally, I use basic things like trend lines, 20/50 MA, RSI, CCI and the ADX. I took an entire course on technical analysis during my senior year of undergrad. It was kinda fun to draw point and figure charts and to identify patterns and learn Elliott Wave theory, but I like to keep it simple. I use technicals to time my trades, rather than decide what I will invest in.
don’t use any…i understand it can be detrimental in the short term but my view is its not likely to make a material difference if your holding period is longer than 2 years…
the point is that if you are managing a institutional portfolio with something like +10m… i would say that timining entries/exits using TA, you can bring the average cost of all positions down at least few cents (if you hire me/ a lot more)… and at the end of the day those few cents represent a few hundred thousand dollars.
i worked at a shop that had a 100m portfolio and the manager never looked at a chart… he would get to work and say… “today we are buying XYZ”… i estimated that he “lost” 2-3 percent in performance over a few years because of the sloppy trading…
“today we are getting out of ABC”… well if you had a freaking clue about trading… that liquidation could be worth an extra 10-20k if you use TA… and then they complain about token operating expenses.
if i was managing more money, that gives me more of a reason NOT to use TA…i think looking at charts etc is stupid…i i understand that you’re guaging market sentiment etc, i just find the whole ordeal to be very unappealing…
I agree with what others have mentioned in that it’s vital to think about timing of entry/exit, and if technicals can help you do that, then why not use them? This, of course, is largely indepedent of what one’s investment horizon is.
dvictr and bpdulog, can you provide an example of where you’ve used moving averages and how you’ve used them when making a decision to enter/exit? How did your use of technical indicators improve the way that you managed risk? I started reading about technicals a few months ago with great interest, and although I have no interest in becoming a pure technician, I am looking to learn more about how fundamental investors have used TA to complement their execution.
I use technicals, mostly moving averages, sometimes stochastics (which I don’t feel I know how to use optimally), but I’ve also used trend lines and triangle formations from time to time. In macro work they are surprisingly useful, but by no means a sure thing. What they do is to help categorize the universe of possibilities so that you can better estimate condtional probabilities of price behavior.
The other thing is that much technical analysis is structured as “setup-confirm” logic. The main action points are not in “gambling on the pattern completing itself” but more about “watching for changes in patterns.” When a pattern first changes from what it is to something else, you have a signal to pay attention. Then there is usually a second signal that “confirms” the change isn’t just a momentary distortion. When you get a confirmation, that’s usually when traders decide to buy or sell. You’ll virtually always miss the bottoms and tops because the confirmations never come then, but a little later. Still, by watching patterns, you can set stops to help control your downside risk, because the stops take you out of your trade when your thesis is wrong.
All that matters in trading is that your average winning trade is sufficiently large to outweigh your average losing trades, which may in fact be more numerous (but smaller). Psychologically, it can be hard to feel like you’re being nibbled to death by ducks while waiting for that large win that would make it all worth while.
However, trading and investing are different breeds of action. I understand why value investors don’t want to wait too long for a technical signal, because they are afraid of losing out on a good valuation. For true technical traders, they don’t really care that about valuation, becuase they feel that they will most likely be out of the trade by the time the thing reverts to fair value. What they are wating for is a change in technical behavior that signals it is time to open or close the trade.
start with making a distinction between the trader that is using TA to speculate on short term price movements and a portfolio manager using TA to build a portfolio. my point is that if you plan to build a position of hundreds of thousands/ millions of shares, a decent trader will be able to acquire the same position(build the same portfolio) at a lower average cost, and later realize the positions at a higher average price. trading efficiency is a main factor of manager alpha.
Well, naturally I am inclined to agree with you but I think if you can pick up a few bps using TA when intiating buys and sells its totally worth it. I don’t want to leave cash on the table if I don’t have to, one issue though is where the trade off is in terms of investing energy into understanding/mastering TA and focusing on the day to day fundamentals of value investing.
I am somewhat unsure if there is much value in understanding TA given my investment philosphy.
so i initiated a position in JPM a month ago at roughly 34.50. the max i was willing to pay was 35 at the time. what would you have done to ensure that i got my position and paid the least?
or better yet, lets say palantir wants to get into Teva…and he doesn’t want to pay more than 40 bucks…what would you do right now?
I think technical analysis has some merits - but only because many people believe in the same thing. If you want to take advantage of TA, do a poll of 1000 traders and ask them what technical indicators they use. If most of them say “I will buy if condition XXX occurs”, and they are honest, then you know what will happen at condition XXX. TA can be useful because it’s a way to herd people into the same behavior, not because there is some scientific reason that the stock market should behave in some non-random way.
I was initially skeptical of TA, but I think it has some merit after looking at things for a while.
If you try to figure out what the fair value of an asset or the market as a whole is, it ultimately all depends on the set of assumptions you make about things like future earnings growth, what the equity risk premium should be, what the long term risk-free rate will be, and possible risks to the market and/or company.
Change those assumptions by only a tiny fraction - well within the noise levels you can get by estimating from historical values - and those prices and/or valuations can move up and down by a large amount. For example, whether you use the 90d Tbill rate for the RFR (0.15%) or the 10-year note (1.55%) will make a big difference in your valuation.
This creates a kind of “zone of value,” within which prices may fluctuate without clearly being overvalued or undervalued. Another way to put this is that there is a “zone of value” where reasonable people whose assumptions differ by only a tiny bit are likely to find the security worth holding.
What happens in the zone of value. Do they move randomly within this zone? Perhaps, but it is also true that while a genuine random walk can go all over the place, an asset should not be able to stray too far from fair value before buying or selling pressure will push it back in. To me, this sounds like the sort of thing that can create technical channels. Within the channels it may be a random walk, but toward the edges, it no longer is purely random. Even within the channels, there may be reflections of the psychology of traders.
I don’t want to reveal too much of my mental model here, but that’s the gist of it.
The framework is not fully my own. Alexander Elder is the first person I read who used the term “zone of value.” I add my own take to that very useful view, though.