Ask Colin

Should I use fundamentals for market direction and technical analysis to pick the bottom of trends?

There are two important issues here:

1. Most traders learn sooner or later that you cannot pick the tops and bottoms of trends. Only liars do it all the time and luck allows us the occasional victory. The real game is to take a large proportion of the trend - anything from 50 to 80% is good. So, for me the best approach is to buy uptrending markets and sell downtrending ones. However, there are many ways to make profits from trading, including scalping, market-making, day trading, hedging, short term trading, position trading, arbitrage and so on. You need to know what you are trying to do and learn the skills relevant to that method. For example, a position trader may buy strength, while a day traders sells into strength. Amateurs buy a breakout and make money in one time frame, while professionals fade the breakout and make money in a shorter time frame.

2. Fundamentals are best used to determine which market to trade and in what direction. Technical analysis is best used for timing those trades and investments. They are complementary and should be used together in a complete approach.