In this episode of the SCT Podcast Sarah Potter and TJ discuss the differences between fundamental analysis and technical analysis. Fundamental analysis is typically discussed in the media about trading options and stocks. Fundamental analysis attempts to assess the financial health of a company and determine if the current market price of the stock is under or over valued.
Technical analysis on the other hand looks at charts and chart patterns and looks at the supply and demand for the stocks and whether current price trends will continue or reverse.
Both technical and fundamental analysis have their place in investing, for the short term weekly options trades that we place in the shecantrade trading room, a combination of technical analysis and probability trading from the options chain are what we use to select our trades.
Fundamental analysis is best used for longer term trading when the financial growth prospects of the company can be fully realized over a few years.
Sarah: Hi everybody, it's Sarah Potter from shecantrade.com and this is the SCT podcast. We are on episode 38. I have TJ here.
TJ: Good afternoon.
Sarah: And today's discussion we're going to talk a little bit about technical analysis versus fundamental analysis and basically why we choose to look at what we do to gather evidence to place the best trades. What we're really proud of in the live trading room she can trade is that we are very consistent in our approach to trading and as a result that really comes from finding good evidence from the beginning, we really focus on getting it right from the beginning as opposed to just placing trades and then adjusting or rolling trades as we proceed in them. So kind of front-running the evidence I suppose and trying to gather pieces from all sorts of different areas to make sure we have a good perspective when we're placing trades. Now the basis of what we both trade both TJ and I is technical analysis, but you know I think even within the umbrella of technical analysis there's a lot of different areas, a lot of different systems that people use to place trades and I'm not really sure we do everything in technical analysis. So I don't know, what do you think you would you call yourself a technical trader or a Chartist like, how would you define yourself?
TJ: Well definitely for the weekly trades, the day trades, the swing it's definitely not fundamentals, so yeah, I consider myself a technical analyst.
Sarah: But I think when someone thinks about technical analyst I think sometimes you're thinking about somebody who spends a lot of time, very detailed amount of patterns in charts and when I've seen you trade, you do use how price moves but you're not getting that detail in terms of the patterns you're look for.
TJ: Yeah, that's true. I don't think what we do is we would I do anyways I think kind of the broad concept from technical analysis, you know in terms of support resistance, trend, reversals and really applied at a pretty high level kind of the 10,000 foot level instead of getting into it right you know right down to the nitty-gritty and counting the number of bars in a triangle and you know the exact shape of the triangle and you know going back and looking at every time it happened for the last ten years and will it happen again, I think definitely, I don't delve into it that deeply and there are a lot of people that that really do it and use it to quite a bit of success. I think anything that you use, you need to, whether it's technical or fundamental you can't use it in isolation on its own, you need to combine it with what you're seeing and the options chain, what you're seeing on the charts, what you're seeing on short-term, what you're seeing on some long-term charts, what you've seen that stock do in the past and put that all together and take a little bit from every piece of that and then and then evaluate your trade. So yeah, definitely I use definitely use all the principles and it's a mosaic you know you grab a little bit of a little nugget from here, a little something from there you know something that you've learned here over there that works and you kind of put it all together and wrap it all up and apply it and I think that's why every trader has a slightly different style and I think that's the same thing with the trading room as well is that you know none of our members, are going to trade exactly like us or are going to look at the market exactly like us, but as long as we can give them some nuggets and some good trades and you know discuss the pros and cons good and bad of each trade before we place it then everyone is educated and everyone can make that decision to trade on their own and I think that's the important thing is building the story yourself and just being confident in the trades.
Sarah: Yeah, I mean so I think when you're talking about it, it really does ring true to what I'm saying is that yes we're technical traders. I am as well, I do want to pay attention to how price is moving but I want to look at things like how it’s moved in the past as opposed to, oh today we've seen this many Bars in a consolidation so it must mean it's going to break out. I actually think that a lot of times we spend a lot of time there too much time in charts it's very good at looking back in history and identifying areas to enter our exit rates but because we're trading live and we're actually looking to get filled on our trades to make money on our trades then we need to be able to see things in the moment, recognize patterns certainly that have happened in the past, we can rely on those pieces of evidence but if you're only doing the charts I think you're missing another part of the picture and in options trading because we do have an options chain there's a lot of information there and that tells a story too. So what we both do in the trading room very successfully is take pieces of technical analysis and layer it in with the options chain but what I find interesting is that I've tried just looking for trades only through the auctions chain and I can't really find trades that way. So I definitely rely on technical analysis to find my trades, to choose the stocks that I'm going to spend more time and to decide whether or not a trade is actually setting up. So for me when I'm starting to look for trades I'm going to focus on the daily chart that's really where I'm filtering through all the different stocks, it comes from the daily and if something from the daily piques my interest then I'm going to go out to different timeframes and look to see how it's moving. So I want to look historically, looking on a weekly chart to see what is it done in the past are there any key areas of support and resistance, what does the trend look like, is it consolidating, those kinds of things and then from the weekly chart if things still look good and I'm still excited in the trade then that's where I'm going to move to the shorter term pieces like the 60 minute and the 5 minute to then get more precise about my entries. And then from there we're going to take all the evidence we've already gathered and then layer that into the options chain. Actually today in the trading room, I was looking at one stock at Walmart and the Walmart chart, so from a technical analysis point of view looked fantastic, it pretty well had everything, steep trend, no resistance, multiple timeframes everything looked like it was going to pop up it looked like an idea a great trade to place led to buy a call but when we moved into the options chain and started looking out to next week in terms of expiry which is where I was going to purchase the option, it didn't look as good anymore. The probability of success to me didn't look as as great as I would like it to and so I didn't place the trade so there's times where I'm going to gather all sorts of different evidence from the charts but if I can't get it to line up with what it looks like in the options chain, it's not worth placing the trade, it's probably worth putting it on a short list perhaps trading it next week once that expiry is moved on but it actually stopped me from getting into a trade. So layering what you see in charts with what you see in the options chain and what we know what's happening in the media too can also be helpful when we're actually putting together that trade. Now you use probability as well when you're placing trades especially sometimes with some day trading, how do you layer in different pieces of evidence? You're really well known TJ for your day trades, what kind of evidence to use there is it any different than when your swing trading?
TJ: I think so. I think if it's if we're day trading I'm looking for something is going to happen either the next day or later that day. So I think the evidence that we that shows up on the options chain is more timely because it's you know there's less time before that option expires so what I'm seeing is you know is probably going to be the most accurate information that I'm seeing. For example, you know let's talk about Delta. Delta changes very rapidly it can and it can go from you know you can go from a delta 20 to a Delta 80 on an option on a strike pretty quickly if the stock really gets you know really gets moving, you know if we you know let's take an example again with a delta and we go to expiry and we look at expiry that delta number is going to be the most accurate right before 4 o'clock on that Friday and that's just the nature of the market so if I'm taking a day trade you know I'm relying more on what I'm seeing on the options chain I'm trusting it a little bit more because there's less time between now and expiry for the market to move, for traders to change their mind, for new big positions to be initiated. So definitely for the day trading I'm looking at the options chain, I'm looking at the details from the options chain and I'm taking that at a more of face value, I'm looking for things like you know where's the volume today, you know where is volume coming in, is it close to the strikes I'm trading, is it far away, is there a skew to the put side or the call side, is there a lot more credit on the put side than on the call side? You know there's the market and we look at the credit is the market pricing and a bigger move to the put side or the call side and these are all things that I look at in that that I use from the options chain to form my day trading decision and then I'll go to the chart and I'll look at those support and resistance levels from the options chain, you know based on like I said on credit, on volume, on open interest and I'll compare those to the moving averages, you know more traditional support and resistance on the chart and I'll see if any of those levels line up. And again you know the more the more things that line up at a certain point you know typically this areas as more traders will be looking at that point as well. So it will you know if you know if there's a lot of traders looking at say 2400 to hold on the S&P, there's a good chance that it probably will. So yes I use a lot of evidence and I think a lot of it is just looking at subtleties and seeing if there's you know a little bit something different than last week or you know something's changed between the morning in the afternoon, you know nothing will really kind of showed out at you but by the time you put it put together 3, 4, 6, 8 pieces of information and you build your case you know at least you've got at least the evidence that you know is supporting the trade.
Sarah: Okay, so what we haven't talked about is fundamental analysis. And that is also very traditional, there's a lot of people in that group in camp that would say that that is an important piece to trading, but it's something that you and I both don't use and that might just be because of our outlook and how we setup our trades, because we are generally trading and looking to get out of the trade within a week or two. So do you think there's a role to play with fundamental analysis in the approach or the system of which we trade the market?
TJ: I honestly don't think so for short-term trades. I don't think the fundamental analysis, I don't think any of that has enough time to play out during the week. I think fundamental analysis takes a longer time to work its way into the system, to work its way you know we see that you know companies release they've got good, good fundamentals you look ok it's a growing company you know price should go up over the next six months to a year that's great but we're typically in well I'm typically in a trade two or three days. So the market knows that yes, fundamentals might be good or fundamentals might be changing but you know there's no real time for that to take hold in the market. No obviously, earnings which is a fundamental event obviously if you want to consider that do have a big impact and we obviously you know we've talked about that in previous podcast with earnings, but generally yeah you know it doesn't I don't really pay attention to it at all.
Sarah: Do you think what we have both been paying attention to though and what is relevant from very much for our style of trading though is what's happening in terms of in media and whatever you want to call that in terms of its analysis being very aware of what's happening on a global stage will impact the broad market especially which then will roll into the trades that we're in? So it is important to be paying attention to what's going on in the world because that will influence how price will move and so whether you're a technical or fundamental trader I do think that that's very important. We have geopolitical news that is influencing the market these days and I think as we move forward that will definitely be something we'll need to be very considerate of. The beautiful thing which is we're talking about the trading room today actually, the wonderful thing about the style of which we do trade is that it doesn't really matter what happens in the market two or three weeks down the road because we're probably out of those trades and we can easily-easily readjust to how the markets moving at the time. So whereas somebody who's maybe more long term is thinking, oh is this a dip this is my opportunity to buy and then we're going to see things move up and they're thinking about longer-term stances in the market, we don't have to be as concerned about that, we can be fluid and flexible with the market depending on how things are portraying themselves and we can take advantage of the trades that we're seeing and I think marrying the combination between some technical analysis linked with what we're seeing in the options chain and keeping in mind what's going on in the world is kind of the three core pieces to have really great trades. All right let's leave it there, that was a great discussion, certainly there's a lot of camps and a lot of points of view on technical and fundamental trading. As always we really do appreciate your review so anytime you can review she can trade or our podcast I would really appreciate it, those are very important and honest review is very helpful and come and check us out the live trading room at Shecantrade.com Happy trading everybody.