I Available Alternatives

A number of possibilities are available as measures to resolve the problems and limitations in the use of fundamental analysis for short-term and day trading. These are as follows:

•  Technical analysis methods: These are approaches to market
forecasting and trading based on chart patterns, mathematical
analyses, and other methods not involving or requiring knowl
edge of underlying fundamentals. The technical approach, as
you will see in the next chapter, rejects the need for, and often
the value of, fundamental factors in the decision-making
process, trade selection process, and timing of trades.

•  Hybrid approach using technical and fundamental methods: This
approach is used by many traders with varying degrees of suc-

Opening Gaps in GE. Note how prices reversed direction following opening gaps as illustrated. Arrows show gap down openings. Note that not all opening gaps down result in profitable trades.

cess. It incorporates what traders believe to be the more significant and effective aspects of fundamentals and technicals and is also discussed in the next chapter. Market structure analysis: This area of market timing has grown considerably in popularity since the early 1990s. Several methods fall under this category, all of which depend, to varying degrees, on an understanding of who is buying and who is selling, who wants to buy or who wants to sell, and at what prices. In effect, these methods give traders information about the internal strength or weakness of a stock or futures market by examining the prices at which market makers are willing to buy or sell and in what quantities (i.e., the number of shares or contracts). The use of Nasdaq Level II data is the most popular market structure approach to short-term and day trading

in stocks. The Market Profile™ work of J. Peter Steidlmayer is another example of this approach (Porcupine Press, 1986). Potpourri: This method, which may seem peculiar to you, is, in fact, the one that most traders use. I italicize the term method because, in effect, this is not really a trading approach at all. It is a hodgepodge of often loosely connected facts and opinions; technical and fundamental information; intuition; instinct; fantasies; emotions; news; broker and newsletter writer opin-

Having looked at an introduction to fundamental analysis and its variations, let's now go to an overview of technical approaches in Chapter 7.

ions; tips and advice gathered from friends, family, and/or Internet chat rooms; and even astrology. Although the vast majority of SSF traders and traditional futures traders use a potpourri approach, it is by no means either a testable procedure or a valid one. More often than not, those who follow no solid trading system or model are (and will be) ruled by emotions. Their trading will be neither systematic nor consistent. And unless these traders are exceptionally lucky or highly effective at risk management, in the long run their outcome will be negative.

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