Learn the trade here. Make it on tradeMONSTER

Options Trading News

January 1, 2013  Tue 7:10 AM CT

SPX: SEE CHART GET CHAIN FIND STRATEGIES
Simple technical or fundamental analysis alone may not lead to winning trades, but too much complexity is no guarantee of success either. Combining various types of analysis while not letting them get overly complicated can be the key to beating the markets.

The first problem with simple fundamental analysis is that everyone is doing it. A ton of equity shops use various forms of this research on which to base their buying and selling, and I can't name a single one that consistently beats the market.

Another issue with fundamentals is that they may work in the long term but do not take into account short-term volatility. So it may be fine for the Warren Buffetts of the world, but not for us mere mortals.

Technical analysis tends to draw sharp reactions, both positive and negative. There are those who say that it has no basis in reality and is far too subjective to be useful. Nevertheless, it appears that almost everyone that has anything to say about the markets, including large hedge-fund managers, incorporate technicals in their evaluations.

I know of a number of traders and funds that use fundamental analysis to decide what to buy and technical analysis to decide when to buy. But simple technical analysis usually doesn't work; if it did, you would see a lot more successful funds that used it.

Most "trend followers" use technical analysis and may be successful in the long term but have long stretches of underperformance. Advocates usually just add another level of technical analysis to their trading, but that is rarely successful either.

Even volatility analysis, an important tool that had long been underappreciated, is becoming more widely incorporated and therefore less reliable.

In the last couple of years I have shifted my analysis to incorporate volatility data, technical analysis, and some key fundamentals. This may sound dauntingly complex, but I use simple metrics from each of these categories. Those are then translated to a graphical grid that guides my buying and selling decisions.

It is a systematic approach, and my guidelines are clear and written down. I don't break those rules because, when I do, it is usually just for egotistical reasons that tend to lose money.

As I have stressed many times, it is crucial to maintain written rules at all times when trading. They should include specific entry and exit points while outlining how to take gains and losses.

The importance of rules--and sticking to them--is often overlooked. There is no Holy Grail in the market, and no combination of analysis techniques will always be right. But a combination of various disciplines will likely maximize your chances for success.

(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Dec. 27.)
Share this article with your friends


Related Stories

SPX

Stocks drift before retail sales

September 12, 2014

S&P 500 were fractionally positive but are now down less than 0.1 percent. European markets are little-changed, while Asia was mostly higher overnight.

SPX

Retail, consumer data on docket

September 12, 2014

Today's economic agenda focuses on the U.S. consumer, with retail sales at 8:30 a.m. ET and consumer sentiment at 9:55 a.m. ET.

SPX

Commodities weigh down futures

September 11, 2014

S&P 500 futures are off 0.3 percent, while economically sensitive products like oil and copper are down more than 1 percent. Europe is fractionally lower, and most Asian indexes also saw small declines.

SPX

Labor, German inflation data on tap

September 11, 2014

The Labor Department reports weekly jobless claims at 8:30 a.m. ET. Economists forecast that 300,000 Americans sought unemployment benefits.

SPX

Stocks trying to hold after pullback

September 10, 2014

S&P 500 futures are little-changed after inching higher about two hours ago. Most overseas markets fell in both Europe and Asia, though a weak Japanese yen remains a positive for bullish sentiment.

Premium Services

Free Webinars

Swing Trading w/ Jon Najarian and Ron Ianieri

Education & Strategy

When to listen (and not talk)

Success is often built on listening. I just spent a few days on vacation with the family, with a number...

View more education articles »
optionMONSTER stockMONSTER tradeMONSTER