Why Technical Indicators

 

The fight continues to rage among traders whouse technical indicators and those who preferfundamental information to establish newpositions and to exit current positions.

The fundamentalist believe in knowing all thefacts about a company such as price earningsratios, sales growth, product margins, management capabilities, cost of production, cash flow, etc., etc. while the technicianscould care less about the latter and want to seesector price trends and rank, the RelativeStrength Index, MACD (moving average convergencedivergence), stochastics, trend lines, chartpatterns and many more esoterically evolvedindicators.

Which method is the best?

There is no Holy Grail of trading and whatcritics of either method forget that it is thetrader who adds the final nuance that results inprofit or loss. The more years a professionalinvestor has been working his plan the moresuccessful he usually becomes. The unsuccessfulones have long since gone broke and are nolonger in the game.

The technical trader will ignore theinformational approach with the use of chartsand other indicators. Short term traders must betechnicians, especially day traders, as thereare no fundamentals upon which they can assesstheir buys and sells.

Technical trading is based on the psychologyof the mass of traders that ride upon the hiddenvalues of the changing fundamentals. Charts andother indicators tell the of the long termhealth of a company, country or commodity as itis shown in the price action. The fundamentalistlooks for the reason for a change to buy or sellwhereas the technician tries to find the changein the price action to initiate buys and sells.

No matter what a fundamental trader's positionhe must be very patient. He may have a positionon for years. During that same period there willbe waves of highs and lows during which heremains constant in his position. The technicianmay trade the same equity several times buyingthe low of the wave and selling the high(hopefully). In commodities it is astutetrading, but when it is done in stocks and fundsit is called timing.

A combination of technical and fundamentalmethods can give the best results. For theaverage guy occasional trader I can only cautionhim to be very careful. Very few intermittenttraders ever make money.

A successful trading approach requirescommitment. It is a business the same as owninga shoe store or trucking company. You must giveit your all.

Like any business you have to work at it.

Copyright 2005

 



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