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Unfortunately, Preston, the thinking in this excerpt, while exactly on
the money, is almost totally disregarded by newbie's. It's not
promoted by the guru's because this kind of thinking goes against the
get rich quick mentality that helps sell their books, services and
systems.
As many of the articles in Roy's newsletter have pointed out, if the
universe of stocks is rigorously screened with fundamentals and quants
prior to applying TA, finding a method of trading from that group is
infinitely easier, much more profitable and substantially more
consistent than screening stocks based on TA.
I just did a series of systems tests on Value Line data back to 1998.
(Thank you very much, Cameron, for assisting with the data. I hope you
got the material I sent to you.) The tests were based on using two
methods of trading the list of stocks. The first method was a simple
trend system based on a pre-trend signal and then the making a new
highs within 30 days of the pre-trend signal. The second method of
trading was simply taking stocks that had been placed on the list
sometime during the year, but that were in an extended pullback of
several weeks. Trades were based on the stock having been in the
pullback period a set amount of time and then breaking out of the
pullback based on a couple of basic trend indicators.
Half of the capital account was dedicated to each method. For the nine
years of the test 1998 to 2006, the average return was 15.8%. The std
dev was only 7.9% with an average of around 50% winning trades and
drawdowns of less than 3%. This is amazing consistency for a
mechanical system, especially when the roller coaster time frame is
taken into consideration.
During the nine year period from 1998 to 2006 none of the years had
negative returns. Even in 2000, which was brutal to most traders who
thought they had the whole thing wired based on their 1998 and 1999
returns, this combined system made 6.5%.
Newbie's want to hear that a system is going to make them 80%, 100% or
more per year. They don't care about making money consistently, just
the huge year returns because that's the vision of sugar plums.
Unfortunately, it's also a fairy tail.
One benchmark I use is to compare private money manager returns to my
own systems. I look at futures traders, equity traders and bond
traders. Annual return is not the only number that matters. I want to
see the volatility and the consistency in their methods.
This system returned an average of 16.4% over the last 5 years with a
std dev of 9.4%. Comparing that to the pro's returns as I've
described, those returns would have made any of them very popular
money managers, especially when they didn't lose any money in 2002.
Based on my experience with this type of trading, my actual returns
beat the mechanical test returns fairly easily. By looking at the
charts, it is obvious when a buy signal is present but the chart still
looks weak. The application of discretionary logic in this case is
easy and works very well to improve the system performance.
There will be many readers of this post who will scoff at those
returns. No problem. I know what the last nine years have been like
and I know the value of consistency.
Some readers of your forum will ask me to post the system, etc. I'm
not going to do that. If there is enough interest in how this simple
but effective system works, send Roy an email asking him to run the
test results and discussion as an article in MSTT, and I may take the
time to write it up, if there is enough interest.
The main point of this message was basically to add some numbers to
the text of what you had posted.
It's too bad so few people will pay attention to what you contributed.
--- In equismetastock@xxxxxxxxxxxxxxx, pumrysh <no_reply@xxx> wrote:
>
> The Trend Rider:
> Technical vs. Fundamental Analysis
> Chris Rowe
>
>
> When we analyze a company, we use fundamental analysis. When we
> analyze a stock, we use technical analysis.
>
> A "trader," is more likely to use technical analysis because it is
> known to more accurately assist in predicting the short term moves
> of a stock.
>
> A long term "investor" is more likely to use fundamental analysis
> because it gives a clearer picture of the longer term potential of
> the underlying company behind the ticker symbols of a stock. Both
> forms of analysis are the study of trends and are only as good as
> the individual who is interpreting them.
>
> While you can closely follow and profit from current market trends,
> fundamental analysis is equally as important as technical analysis.
> For instance, I'll go long on a stock when I see that the bulls are
> in control, and the volume is moving higher with the price of the
> stock, but I position myself in the companies that have fundamental
> strength that back up the price movement of the stock.
>
> The two forms of analysis should act as two partners running a
> profitable business. Together, the two are like swordsmen with their
> backs to each other fighting a large group of enemies. One has to
> trust that it can rely on the other to protect its back.
>
> People often lose sight of the fact that there are over 10,000
> stocks to choose from when deciding which to trade. It is important
> not to settle for stocks that don't have the strength that we look
> for, as long as we have the resources to get the ideas in front of
> us that we would even consider trading.
>
> Having strong criteria on both ends is critical, and if one of the
> two is telling you that there is a red flag or a warning sign to
> watch out for, you should have no problem with dropping a stock that
> you believe is suspect. Consider stocks that have strong
> fundamentals AND technical indicators, pitches that are thrown
> directly over the plate.
>
> Let's compare the difference between the two:
>
> Investors typically use fundamental analysis to calculate what a
> company's stock price should be doing. Traders typically use
> technical analysis to draw conclusions as to what a stock will do
> based on what the stock is currently doing. Fundamental analysis
> takes a much more in-depth look at a company and the industry that
> it is in. A fundamental analyst must have much more intimate
> knowledge of an industry and of the story behind the underlying
> company.
>
> Whether this is an advantage or a disadvantage is up for debate and
> has been for ages. The idea is that a fundamental analyst spends a
> great deal of time "unwinding" a company's financials to get a clear
> picture of where the company currently stands.
>
> The fundamental analyst must first study all of the important
> relevant factors that already exist. The next step in fundamental
> analysis is to study the anticipated changes in the company, the
> industry, and the overall economy to try to clarify the picture of
> what will happen in the future.
>
> Technical analysis is more superficial and is done mainly on the
> notion that the story of the company is reflected on the stock
> chart.
>
> While the fundamental analyst studies the existing public
> financials, the technician believes that if a company is poised to
> take off, someone out there already knows it and is already acting
> on it. When a large fund starts to act on knowledge of a company,
> whether it be public or not, they tend to attempt to acquire a large
> number of shares without making it very obvious that they know
> something of value.
>
> This is nearly an impossible task. The public record that the
> technician studies is the chart, because everything that happens,
> such as price movement as well as size of the trades, is recorded.
> Since technical analysis is geared for traders as opposed to
> investors, it is used to act swiftly without taking as much time as
> fundamental analysis. So, the benefit for the technicians is that
> they have one step to take. It's a much faster form of analysis
> that gives them the edge that they need to act quickly. Their main
> advantage is that they don't have to forecast their indicators like
> fundamentalists do. For a technician, the indicators are the
> forecast.
>
> Both fundamental and technical analysis is helpful in painting a
> more complete picture. The two should be used to complement one
> another instead of versus one another. You can find red flags
> telling you to get out of a stock before the rest of the herd by
> using both forms of analysis.
>
> Using fundamental analysis, several warning signs can be found in
> the financials if you look closely enough. Sometimes they are
> warning signs that sophisticated investors will have an easier time
> seeing, and other times the signs are more obvious to the layman,
> such as a company that is taking on way too much debt.
>
> Using Technical analysis however, is a good way to spot red flags
> that a stock might trade lower, based on news that has not yet been
> made public. Let's face it; the stock market is not always fair.
> Oftentimes, someone knows something that will have a huge impact on
> the price of a stock before the rest of the world knows about it.
> This is where technical analysis can really give you the edge that
> you need to save yourself from a loss.
>
> It is for these reasons that we make sure that we use both forms of
> analysis when investing our hard-earned money. On the fundamental
> side, we put in hours, days, weeks, or months of research before
> buying or selling a stock. But technically, sometimes we see
> warning signs that tell us to sell for our protection. You worked
> hard to get the money in the bank and then transferred into your
> stock account. You should work just as hard, if not harder, to keep
> it there.
>
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