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


Stocks inch higher before data

November 25, 2015

S&P 500 futures are up about 0.1 percent, while most of Europe is rallying more than 1 percent. Asia was mostly lower overnight.


Calendar is busy before holiday

November 25, 2015

Today's agenda is packed with data, including mortgage applications, jobless claims, durable goods, personal income and spending, consumer sentiment, and new home sales.


Stocks fall after Russian jet downed

November 24, 2015

S&P 500 futures are down 0.6 percent, while most of Europe has fallen more than 1 percent. Asian markets were little-changed.


GDP, consumer confidence on tap

November 24, 2015

The second reading on third-quarter GDP is scheduled for 8:30 a.m. ET. Forecasters anticipate growth of 2 percent, up from the previously reported 1.5 percent gain.


Stocks drift into busy week of data

November 23, 2015

S&P 500 futures are little-changed, while most of Europe is fractionally lower. Asia also posted small losses overnight. There's also significant volatility in oil.



The fastest money in the market
View full report »

Premium Services

Education & Strategy

The art of trading

As I stated in last week's article, a break out or a break down needs to have a couple things happen before it is considered a confirmed break out or break down. The only problem is that in today's market where things move much more quicker than they did just a few years ago, two days could wind up being the majority of the expected movement, if not the whole movement.

View more education articles »