Options Trading News

January 1, 2013  Tue 7:10 AM CT

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


ISM services lead quiet agenda

October 5, 2015

The agenda quiets this week, though quarterly earnings will begin to flow. European retail sales are the first event early in the session and may have affect sentiment.


Stocks drop after weak jobs report

October 2, 2015

S&P 500 futures are down more than 1 percent after non-farm payrolls missed forecasts. Bonds and gold moved higher.


Monthly job report leads calendar

October 2, 2015

Due at 8:30 a.m. ET, the report is expected to show that 205,000 jobs were added last month, up from August's 173,000 gain.


Stocks higher before ISM report

October 1, 2015

S&P 500 futures are up 0.2 percent but well below their pre-market peak. Europe has traded similarly, with Germany turning negative while France and Italy are up about 0.8 percent.


ISM manufacturing leads agenda

October 1, 2015

Economists are looking for an ISM reading of 50.6, down from 51.1 in August. Natural-gas inventories round out the agenda at 10:30 a.m. ET.


Premium Services

Archived Webinar

Education & Strategy

Options Academy: More on the Covered Call Strategy

Last week, we talked about the Covered Call and the misconceptions that surround it. We spoke about how an investor must realize that the Covered Call is actually a premium collection strategy and not so much a directional one. If an investor can grasp this idea, the investor stands to do a heck of a lot better in the strategy than they currently do.

View more education articles »