Below I describe my approach to investing with a hybrid blend of Fundamental and Technical Analysis. Then I go on to describe my reasoning for this approach. I’d love to hear what you all think and how you all approach investing/trading.
Method to My Madness: Birds Eye View
1. Market Research
Find an industry that is poised to grow. It’s preferable if it features the hopes and dreams of institutional investors, industry insiders, and avid consumers alike. Learn everything about that industry to the point you could work in or start a business in that industry.
2. Find A Dream Team
Identify the greatest companies of that industry. They should be market leaders as well as masters at capital management. They need to exude an aura that fosters the support of the dreamers. Put all these companies on a watchlist.
3. Leave No Stone Unturned
Grab your watchlist and consistently apply fundamental macro/microeconomic analysis to those companies. This should have a focus on both quantitative and qualitative attributes. Be sure to analyze businesses they interact with and the governments that regulate them.
4. Find A Good Price
Gather all the companies that are fair valued and undervalued and mark them for technical analysis. This valuation usually applies to growth (like DCF) but other methods can work here. Be patient with your overvalued companies.
5. Plot Your Course
Apply Elliot Wave analysis to the charts of the companies on the TA list. Select a few projected price points based on the typical wave lengths that commonly occur in the current wave pattern you believe you are in. Consider the current economic trends, market structure (support and resistance), market sentiment, and game theory, and apply Bayesian probability to determine the likelihood of the price action trending towards those points. This approach turns the potential price movement from a guess into a multiple-choice question.
6. Balance Reward and Risk
Determine a stop loss that matches the current and projected volatility. Use your stop loss and projected price appreciation to calculate your Reward to Risk Ratio. Compare this to your win rate to see if this trade would be profitable over repetitive instances. All the trades that are profitable mark for buy, be patient with the rest.
7. Look Before You Leap
Gather all the probable/profitable trade setups and use Stage Analysis to enter your position after the trend begins.
8. Be Vigilant
Monitor your live trades and the company’s economic conditions. Continue evaluating your other candidates to find another one that’s in play. Be aware of and manage your emotions in a responsible way. It’s not a good idea to trade when you’re not at your best. Let your emotions alert you and your logic and reasoning guide you. Do your best to avoid cognitive bias.
9. Find A Clear Exit
Once stage analysis shows you’ve entered consolidation exit your trade. If the trend continues you can enter the trade again but only if the company is still fair valued or undervalued, and if the Reward to Risk Ratio points to a profit when considering your win rate.
10. Rinse and repeat
Debrief and analyze your trades to see where you excelled and where you lost your way. Find ways to identify improvements on your workflow and techniques. Eventually you’ll find what your niche is. When you do, embrace it, but always continue learning to expand your circle of competence.
Disclaimer:
I am not a financial adviser. I cannot determine your risk tolerance. This strategy has significant risk. Please do your own research. Always paper trade and consult a financial advisor before attempting to use a strategy for investing/trading. Good luck out there!
Advocating for a Hybrid Approach of Fundamental and Technical Analysis
This is written from the point of view of a smaller portfolio (position size can enter and exit in less than one trading day).
If you got this far without flipping to the next post then I invite you to read my reasoning behind the approach. I made separate paragraphs to appeal to both sides of the spectrum. I could probably go into a lot more detail but brevity is priceless if it still gets the point across. If it doesn’t fully get across or if it leaves you with more questions I’ll be happy to engage in productive dialogue.
To my fellow traders, integrating fundamental value into my trades allows me to be anticipatory rather than purely reactionary. By understanding upcoming changes in earnings growth and capital management, I can identify promising trade setups with greater conviction and confidence in the market's movements. This enables me to set stop losses that accommodate volatility and let my winners ride, leading to larger reward-to-risk ratios and higher win rates. The combination of high reward-to-risk ratios and high win rates translates to increased profits and reduced anxiety. This strategy also frees me from constantly monitoring screens and charts, allowing me to live my life while still dedicating focused time to research and charting. A significant amount of my market research comes from everyday life experiences (qualitative fundamentals), providing valuable insights into both business-to-consumer and business-to-business dynamics.
To my fellow investors, my nimble portfolio size allows me to plot my course and look before I leap, adopting a humble and sustainable approach. John Maynard Keynes famously said, “The market can stay irrational longer than you can stay solvent.” Waiting for signs that other market participants are starting to agree with me helps avoid being too early or wrong. Unlike those with vast capital who can move the market or sit on losses for years before profiting, I consider opportunity costs seriously. I cut my losses and let my winners ride. Using fundamentals and waiting for confirmation minimizes losses and maximizes gains.
While this strategy may not be groundbreaking, similar approaches have been advocated by investment giants like William J. O'Neil. This hybrid approach offers the best of both worlds: capturing 80% of the upward move while avoiding 80% of the losses. This has led to great returns even during bear markets, as I move on to the next trade setup rather than waiting out corrections. My next step is to develop a long-short strategy, shorting (buying puts in the beginning) only the most predictable companies, to further refine my approach.
Incorporating both fundamental and technical analysis provides a comprehensive strategy that benefits from diversified signals, offering a robust framework for navigating the complexities of the market. The way I see it is this: if you wanted to build a house, would you rely solely on a hammer? Or would you prefer a plethora of tools, each designed to tackle specific tasks with the utmost efficiency and precision?
As for the ensuing discussion I’m not trying to prove something or claim my strategy is the best. I’m expressing what’s worked for me over the last handful of years. Some may ask why I’m giving out my strategy I worked so hard to build for free, well it is merely a Birds Eye view (you’ll still have to research each tactic I mentioned), I didn’t invent any thing (aside from some fundamental analysis techniques that I didn’t mention), my creative input here is piecing together other inventions in a unique way to make a system of systems. Also the stock market isn’t a zero sum game and I make money from investing, trading and working so I don’t really need to. I think paying it forward and creating community discussion would generate way more value for the world than trying to promote another paid book, course, or video amongst the sea of others. I suppose in this instance I’m supporting open source. I respect fundamental, technical, or hybrid analysis biases. I welcome constructive criticism and additional contributions of valuable insight. Or even comment your own strategy (hybrid or not). But this is Reddit so everyone gets to say whatever they want lol. Have at it!
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