Is too much fundamental knowledge a bad thing?
Aug 12, 2017 Trading Blog
I’ve recently begun to dig deeper into the finer details and fundamentals of the oil and gas sector, even diving into the basic supply and demand elements of the actual commodity itself and the players in it. I am by nature a daytrader, not an investor. I have no real connection to the oil and gas industry, it is just my chosen area of the market to apply my technical trading approach, because the sector offers all the things a daytrader needs. My game is trading based on technicals, with a timeframe measured at most in days, but usually in mere hours. The problem I am running into at this point is this: Is this newly expanded fundamental knowledge of the sector/commodity detrimental to my chosen intraday trading timeframe?
Sometimes we don’t notice our mistakes until we see them in others. We all have our own blind spots, or maybe we are just dishonest with ourselves. I’ve certainly had that trading problem before. The mistake specifically looks like this: I find a trade setting up technically and then my mind immediately gets flooded with all the fundamental things that make the stock a loser/winner and then I hesitate on the trade or abandon it altogether based on this larger term opinion. Sometimes that veers in the direction of the company vs. stock mistake which I wrote about. But the mistake I’m talking about here is different. It could be things like earnings, oil price, OPEC news, EIA releases, drilling reports, etc. I’m letting longer term macro things affect the very technical short term. While this in itself isn’t necessarily a bad thing, it becomes a harmful thing when the macro is considered the primary controlling factor of the immediate. The macro should be a background supporting factor, not a primary controlling factor of the micro.
I also see this mistake in others, but from a little different angle, which is what actually led me into discovering that I had the blind spot myself. The mistake takes on a little different form though, it is almost from the exact reverse angle. It looks like this: the fundamental expert with a longer term timeframe gets so microfocused on the immediate, that he loses focus on the longer term macro. I have recently started learning from a group of people who are skilled in the energy area. I mean these guys are genius level, like energy savants. I feel like a complete idiot when listening to what these guys know about the sector. But they have the same problem, just opposite of the one that harms me as a daytrader, but still the same mistake. Whereas I am letting the macro unduly influence the micro, they are letting the micro unduly affect the macro. In both cases, the result is a missed trade and lost profits.
So how do we fix this problem? First of all, each trader has to exactly define their own timeframe and every trading decision must start with that timeframe in mind. I find it helpful to write things down (which is whole reason I have this site). Write down a list of all the things that should be considered as primary decision points for your chosen trading timeframe, and then write down a separate list of things that should be used as supporting or background material for your trading decisions. Always keep them separated in your mind, on paper and in your decision making. If you are a daytrader like me, never let a background factor interfere with your chosen technical trading timeframe. If you are a longer term investor/trader, never let the day to day fluctuations affect your chosen longer term trading timeframe. It sounds like such an easy concept to say, but it is very difficult to actually perform 100% of the time while actively engaged in live trading.
In summary, too much fundamental knowledge probably isn’t a bad thing, however applying that fundamental knowledge at the wrong time or in the wrong way, is a bad thing. There must be a process in place to make sure that knowledge is used properly and at the appropriate time. The solution: Plan ahead. Separate the Micro from the Macro. Write it down. There has to be a recognized hard line between the two, you can’t just let it all float around in your mind without boundaries, because in the heat of trading battle, those hard line defined boundaries are the only thing that will keep you from making the mistakes that destroy your account.