Timescales of Fundamental Analysis

I've always ignored Fundamental Analysis in favour of Technical Analysis, partly because with TA you can choose the timeframe in which you want to be proved right (or wrong): in other words, if you want to daytrade you can, if you want to position trade you can do that as well.

With fundamentals, what is the shortest timeframe one would normally hold a winning trade ? How quickly are you looking to be proved right? Months ? Years ??

It's a good question, but I'm not sure there's an absolute answer.

The answer I subscribe to is that while the fundamentals and the valuation still support the original buy case, then you continue to hold. If something changes, then you consider cutting losses or taking profits and getting out. This might take months, or it might be longer, but certainly if you use TA as well then you have some chance of reducing the opportunity cost of having money in a great fundamental story and then having to wait for the market to catch up. Once I'm in a trade I don't care if I hold it for years, as long as it's performing along the way and the buy case hasn't changed.

Ah yes, I guess I was being a bit blinkered thinking TA or FA only ... FA with a bit of TA for confirmation would be the best way to start this journey.

Any recommendations for good UK-specific books on FA ?? The only one I know of is The Zulu Principle by Jim Slater.

rjay said:

The only one I know of is The Zulu Principle by Jim Slater.

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Ditto, or at least the only one I would recommend. Although if you don't already have the original, it would be worth buying 'Beyond the Zulu Principle' instead which is essentially a revised version. Investors Chronicle is quite good for the fundamental investor.

The most profitable trades I have made in my career had a good fundamental basis for them. Fundamentals can be a great switch such that it makes you trade your system long only or shoort only depending on the bigger picture. I do not take fundamental only trades but I think to disgard either fundamentals or technicals is to put on blinkers.

Fundamental Analysis is largely inappropriate in any discussion of direct implementation of Technical Analysis. Simply on the basis that as all price action discounts all information and intent, the fundamentals are not only effectively led by the technicals, but in actuality, they are too.

Any fundamental analysis of an instrument will rely on recent price action where recent will be relative in terms of timeframe and appropriate to the degree of fuzziness the fundamental analyst wished to build into his or her analysis. Any FA who claim they do not use recent price action don’t realise they are simply by using the more standard information tools of the trade.

There are aspects of global commerce which I do monitor and which could be classed as fundamental in that I am not looking for technical patterns to form on a chart, but I still am only interested in whether they are rising or falling or higher or lower than they were X period ago, so a little grey perhaps – but not FA.

Intermarket Analysis, as I have stated elsewhere, is in my view a most valid support tool for the Technical Analyst who wished to further cultivate their skills in low-risk, high-probability trading. On this topic, and in my view, none surpass Murphy’s work in this area.

The Degrees said:

Any fundamental analysis of an instrument will rely on recent price action...

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Not necessarily. Consider the fundamentals guy who builds a valuation through a DCF or dividend discount model and then compares it to the market price to base a buy/sell decision on. That sidesteps TA completely. Not saying that's how I would do it... Or a good example was Julian Robertson who was a pretty legendary trader (or investor maybe) but rarely used TA. He apparently always said, 'what are the economics? Prices always go the economics'. He took a huge bet on palladium in the mid-90s, but had done all the primary research, visited Siberian mines, visited electonics manufacturers and was convinced there'd be a supply crunch. He knew current prices didn't factor this in. It took three years, but when it came... You'd struggle to define his methodology as incorporating much TA.

rjay said:

With fundamentals, what is the shortest timeframe one would normally hold a winning trade ? How quickly are you looking to be proved right? Months ? Years ??

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It depends on the measure of risk/reward used and on how quickly the target levels are reached. It can be any timeframe but usually we are talking about position trades lasting from several weeks to maybe years.

Traders using fundamentals are also called "value traders". They are essentially trend followers.

Ron

ronblack said:

They are essentially trend followers.

Ron

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I'd argue they're anything but since they're driven by the fundamentals and valuation, not a chart. They're more likely to be contrarians if anything.