Technical Aspects This chapter is especially important because many stock traders who have come to the SSF market have had training and experience in fundamental analysis only. I reiterate my view that fundamental analysis can be highly effective in determining intermediate and long-term trends, but it has its limitations when used for short-term and day trading. It has been my experience that the typical stock investor is severely deficient in the area of technical analysis, charting methods, trend determination, and market timing. The prevailing opinion that none of these skills are especially important for the investor is not valid. Stock market behavior throughout the world has become highly volatile since the mid-1980s. We live in troubled times, and violence is a way of life in several key areas of the world. Threats and acts of terrorism are daily events, and economic stability in many countries is threatened by effete or dysfunctional political systems. Uncertainty and volatility are rampant not only in futures but in stocks, currency relationships, and government policies. Virtually every day brings new concerns and challenges. Furthermore, investors and traders have been blessed with access to a plethora of information, virtually all of which is available instantly via the Internet, business television, fax, and telephone. Stocks rise and fall sharply in reaction to news. Has this been a blessing or a curse? Investors and traders have been blessed with the ability to place orders electronically that are filled within seconds. Brokers compete for customers by offering faster execution of trades, more information about the markets, opinions, research, recommendations, and stock analyses—all available at no additional charge. Some brokerage houses offer ten commission-free trades to new clients. The emphasis on speed of order execution encourages traders to act and react quickly. It invites traders to trade actively and for small price moves. Is the ability to place orders electronically and receive lightning-fast order execution a blessing or a curse? Finally, the commission structure for stocks has also ushered in a new era of price speculation and short-term trading. If you can buy 100 shares of stock for a $14 commission and 5,000 shares of stock for the same $14 commission, then why not be more aggressive? Why not trade in large positions if you have the margin money? Why not increase the base of operations if the commission costs for doing so are minimal? Why not decrease the cost of doing business, thereby increasing the bottom line? Have lower commissions been a blessing or a curse? Clearly, to those who can use the information, make intelligent and disciplined use of low commissions, and effectively integrate the trading platforms offered by brokerage firms with their market methodologies, the recent and significant advances described above can be a godsend. Yet to the newcomer, to the undisciplined trader, or to the average investor, these advances have only created losses. And they will likely continue to do so because most newcomers to trading, whether in stocks, SSFs, or futures, won't be able to use the necessary tools. Why not? Because they lack discipline, education, and experience. In this respect the SSF market is no different from any other market. To trade SSFs profitably, you need knowledge, perseverance, discipline, and solid risk management. Finally, the fact that SSF margin requirements are 20 percent of the full value of the 100-share contract won't work in favor of most traders. The perception of success will become an elusive reality; lower margins create more volatility. Even though the leverage afforded by low margins can work for you, it more often than not works against you. Trading SSFs or, for that matter, any futures market on margin is like driving an 800-horsepower race car. Without training, you can kill yourself; with training, you stand a chance at winning in a highly competitive field. Based on my lengthy experience in both the equities and futures markets, I believe that the best approach is a purely technical one because it facilitates discipline. Some, however, disagree with me, so the rest of this book may not interest those of you firmly committed to the fundamental side. However, if you give me a chance, I think I can show you a few technical methods that may well enhance your results with fundamental analysis. Remember that in both the long and the short run, timing is not nearly as important in stocks as it is in futures. When you're dealing with a 20 percent margin as opposed to a 50 percent or 100 percent margin, you have less room and time for error, which is why timing is of the essence, regardless of whether you know the fundamentals. I am not discounting the importance of timing in long-term stock investing; I am merely emphasizing an inherent fact about the markets. Because the goal of technical analysis is to pinpoint the timing of a market move or change in trend to an exact point, I believe that all traders would do well to understand and employ technical analysis. No, technical analysis isn't the Holy Grail, but it certainly has the ability to help you pinpoint market timing. free stock trade ~ stocks |