Zen And The Art Of Technical Analysis Part 3

Zen And The Art Of Technical Analysis Part 3

I love the quote attributed to Jack Welch “As long as we are going on opinion I’ll use mine” or something like that. Trading options involves lots of opinions. I’ve already covered the fact that there are people that believe trading options is risky. And it is. However, I maintain that it CAN BE FAR less risky than trading without options. However, that is just my opinion, based on my years of experience trading options successfully, which is a fact. The three “legs” of due diligence all involve opinion and some facts.

There are lots of facts involved in fundamental analysis, and there are also opinions. The PE ratio based on past earnings is a fact. It is math. For me, math is fact. The numbers are known, not guesses or made up thanks to SOX, that is sarcasm. The forward PE is based on someone’s opinion of future earnings, someone made up a number based on some facts but it is still just an opinion. So what is a good PE? That would be a matter of opinion. I think we could agree on that really high PE’s are not good. Whether or not lower PE’s are good is a matter of opinion. Past growth rates are a fact; future growth rates are opinions. Some people are better guessers than others, but it is still just an opinion. The point here is that even parts of fundamental analysis are opinion not fact. Of course, it is an opinion that fundamentally sound stocks will go up or at least not drop, unless we have a credit crisis.

We can also look at sentiment. The facts of sentiment are whether people are buying or selling and what they are buying or selling. The opinion is whether or not that will continue. We can measure how much has been purchased or sold. We can only guess at how long it will continue.

Technical analysis has support and resistance. It is a fact that a stock has held support and stopped at resistance in the past. It is a fact that several indicators are showing bullish signals. It may be a fact that a bullish move has followed these bullish indicators in the past. It is opinion that it will work in the future by indicating a similar bullish move. It might be a fact later but right now it is an opinion that trades will work that take advantage of the expected move. So technical analysis is made up of fact and opinion. It has always amazed me how lines drawn on a chart today show how I could have traded the equity in the past. It is my opinion that they will show me how to trade the future.

For a given fundamental, sentimental and technical opinions it is an opinion as to what trade is the best trade. As I’ve written before, my favorite trade, my biggest money maker, is not widely loved. I’ve been trading it for years. Sometimes doing very well and sometimes not. Fortunately, it does well far more often than it does not. That is a fact. The better I am determining my expectation correctly, my opinion, of what an equity will do, the better my trades do. I have worked hard to determine the best way for me to form my opinions/expectations. I get better every year. The more I study, the more I learn. Another fact.

I use technicals much more than fundamentals. I watch for changes on sentiment to see how long changes in technicals will be. So in my opinion, my trades needs to fit my expectations. My expectations are based on facts and opinions. Some of those opinions are mine, and some are other people’s opinion but in the end it is my opinion of all of those opinions that I trade. I use my opinions to determine my expectations and trades. In the end, my success or failure is based on my opinion. I am very happy with that.

Ken Bailey
OptionsANIMAL Instructor

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