Markets generate vast volumes of information: annual and quarterly reports, earnings estimates, corporate insiders' reports, industry group studies, technology forecasts, weekly, daily, and intraday charts, tech nical indicators, trading volume, opinions in chat rooms, the never ending discussion circles on the Internet. With so much data, you soon realize your analysis can never be complete.

Some traders who have lost money fall into paralysis from analysis. They develop a quaint notion that if they analyze more data, they'll stop losing and become winners. You can recognize them by their beautiful charts and shelves crammed with stock reports. They will show you indicator signals in the middle of any chart, but when you ask them what they will do at the right edge, they only mumble because they do not trade.

Analysts are paid to be right; traders are paid to be profitable. Those are two different goals, calling for different temperaments. Institutions tend to separate traders and analysts into different departments. Private traders have no such luxury.

Analysis quickly reaches the point of diminishing returns. The goal is not to be complete but to develop a decision-making process and back it up with money management. You need to develop several analytic screens to reduce a huge volume of market information to a manageable size.

Fundamental Analysis

Fundamental analysts predict price movements on the basis of supply and demand. In stocks, they study supply and demand for company products. In futures they research supply and demand for commodities.

Has a company announced a new technological breakthrough? An expansion abroad? A new strategic partnership? A new chief executive? Anything that happens to the business can influence the supply of its products and their costs. Almost everything that happens in society can influence the demand.

Fundamental analysis is hard because the importance of different factors changes with the passage of time. For example, during an eco nomic expansion, fundamental analysts are likely to focus on growth rates, but during a recession, on the safety of dividends. A dividend may seem like a quaint relic in a go-go bull market, but when the chips are down the ultimate test of a stock is how much income it generates. A fundamental analyst must keep an eye on the crowd, as it shifts its attention from market share to technological innovation to whatever else preoccupies it at the moment. Fundamental analysts study values, but the relationship between values and prices is not direct. It's that mile-long rubber band all over again.

The job of a fundamental analyst in the futures markets isn't much easier. How do you read the actions of the Federal Reserve, with its great power over interest rates and the economy? How do you analyze weather reports during the critical growing seasons in the grain markets? How do you estimate carryover stocks and weather prospects in the Southern versus the Northern Hemispheres which are six months apart in their weather cycles? You can spend a lifetime learning the fundamentals, or you can look for capable people who sell their research.

Fundamental analysis is much more narrow than technical. A mov ing average works similarly in soybeans and IBM, on weekly, daily, and intraday charts. MACD-Histogram flashes similar messages in Treasury bonds and Intel. Should we forget about the fundamentals and concentrate on technicals? Many traders take the path of least resistance, but I think this is a mistake.

Fundamental factors are very important to a long-term trader who wants to ride major trends for several months or years. If the fundamentals are bullish, we should favor the long side of the market, and if bearish, the short side. Fundamental analysis is less relevant to a short-term trader or a day-trader.

You do not have to become online investors in the fundamental analysis of every stock and commodity market. There are very intelligent people who specialize in that, and they publish their research. Many of them also bang their heads against the walls, unable to understand why, if they know so much about their markets, they cannot make money trading options.

If we can take our ideas from fundamental analysts but filter them through technical screens, we'll be miles of head of those who analyze only fundamentals or technicals. Bullish fundamentals must be confirmed by rising technical indicators; otherwise they are suspect. Bearish fundamentals must be confirmed by falling technical indicators. When fundamentals and technicals are in gear, a savvy trader can have a field day.

WHERE DO I GO FROM HERE ? The main book on the fundamental analysis of stocks is Security Analysis by Graham and Dodd. Both authors are long dead, but the book is being kept up-to-date by their disciples. If you decide to study it, make sure to get the latest edition. Warren Buffett, a student of Graham, became one of the richest men in the world. There is an easy-to-read book that explains his approach to fundamental analysis-The Buffett Way by Robert G. Hagstrom.

The best review of futures fundamentals is in The Futures Game by Teweles and Jones. This classic volume is being revised and updated every 10 years or so (be sure to get the latest edition). It has a section on the fundamentals of every futures market. Whether you trade soybeans or Swiss francs, you can quickly read up on the key factors driving that market.

Technical Analysis

Financial markets run on a two-party system-bulls and bears. Bulls push prices up, bears push them down, while charts show us their footprints. Technical analysts study charts to find where one group overpowers the other. They look for repetitive price patterns, trying to recognize uptrends or downtrends in their early stages and generate buy or sell signals.

The role of technical analysis on Wall Street has changed over the years. It was very popular in the early part of the twentieth century,

ushered in by Charles Dow, the founder of The Wall Street Journal and the originator of the Dow averages. Several prominent analysts, such as Roger Babson, predicted and identified the 1929 top. Then came a quarter century of exile, when institutional analysts had to hide their charts if they wanted to keep their jobs. Technical analysis has become hugely popular since the 1980s. Easy access to personal computers has put technical software within easy reach of traders.

The stock market has become increasingly short-term oriented in recent years. Gone are the days of "buy-and-hold" when people bought "good stocks" for the long run, put them away, and collected divi dends. The pace of economic change is increasing, and stocks are mov ing faster and faster. New industries emerge, old ones sink, and many stocks have become more volatile than commodities. Technical analy sis is well suited for those fast-paced changes.

There are two main types of technical analysis: classical and com puterized. Classical analysis is based solely on the study of charts, with out using anything more complex than a pencil and ruler. Classical technicians look for uptrends and downtrends, support and resistance zones, as well as repetitive patterns, such as triangles and rectangles. It is an easy field to enter, but its main drawback is subjectivity. When a classical technician feels bullish, his ruler tends to inch up, and when he feels bearish, that ruler tends to slide down.

Modern technical analysis relies on computerized indicators whose signals are much more objective. The two main types are trendfollowing indicators and oscillators. Trend-following indicators, such as moving averages, Directional System, and MACD (moving average convergence-divergence), help identify trends. Oscillators, such as Stochastic, Force Index, and Relative Strength Index (RSI) help identify reversals. It is important to select several indicators from both groups, set their parameters, and stay with them. Amateurs often misuse technical analysis by looking for indicators that show them what they want to see.

The main tool of technical analysis is neither the pencil nor the com puter, but the organ that every analyst is supposed to have between his ears-the brain. Still, if two technicians are at the same level of development, the one with a computer has an advantage.

Technical analysis is partly a science and partly an art-partly objective and partly subjective. It relies on computerized methods, but it tracks crowd psychology, which can never be fully objective. The best model for technical analysis is a public opinion poll. Pollsters use sci-entific methods but need psychological flair to design questions and select polling techniques. Price patterns on our computer screens reveal crowd behavior. Technical analysis is applied social psychology, the craft of analyzing mass behavior for profit.

Many beginners, overwhelmed by the sheer volume of data, fall into the trap of automatic trading systems. Their vendors claim to have backtested the best technical tools and put them together into winning systems. Whenever an excited beginner tells me he is planning to buy an automatic system, I ask him what he does for a living and what would happen if I came to compete with him after buying an automatic decision-making system in his field. People want to believe in magic, and if that magic can also save them from working and thinking, they gladly pay good money for it.

Successful trading on the market is based on the 3 M's-Mind, Method, Money. Technical analysis, no matter how clever, is responsible for only onethird of your success. You also need to have sound trading psychology and proper money management, as you'll see later in this book.

WHERE DO I GO FROM HERE ? Technical Analysis of Stock Trends by Edwards and Magee, written in the first half of the twentieth century, is considered the definitive book on classical charting. Get any edition after 1955, because that was the last major revision of the book. Technical Analysis of the Financial Markets by John Murphy offers the most thorough review of modern as well as classical technical analy sis. My first book, Trading for a Living, has large sections on both classical and modern technical analysis.

When to Buy and Sell

The secret of trading is that there is no secret. There is no magic password to profits. Beginners keep looking for a gimmick, and plenty of crafty vendors sell them. In truth, trading is about work-and a bit of flair. It is no different from any other field of human endeavor. Whether you do surgery, teach calculus, or fly an airplane, it all boils down to knowing the rules, having the discipline, putting in the work, and hav-ing a bit of flair.

An intelligent trader pays attention to fundamentals. He is aware of the key forces in the economy. He spends most of his analytic time on technical analysis, working to identify trends and reversals. Later in this book we will review key technical tools and put together a trading plan.

Markets keep changing, and flexibility is the name of the game. A brilliant programmer told me recently that he kept losing money but whoever was buying off of his stops must have been profitable because his stops kept nailing the bottoms of declines. I asked why he didn't start placing his buy orders where he now placed stops. He wouldn't do it because he was too rigid, and for him buy orders were buy orders and stops were stops. A high level of education can be a handicap in trading. Brian Monieson, a noted Chicago trader, once said in an interview, "I have a Ph.D. in mathematics and a background in cybernetics, but I was able to overcome those disadvantages and make money."

Many professional people are preoccupied with being right. Engineers believe that everything can be calculated, and doctors believe that if they run enough tests, they'll come up with the right diagnosis and treatment. Curing a patient involves a lot more than precision. It is a running joke how many doctors and lawyers lose money in the markets. Why? Certainly not for lack of intelligence, but for lack of humil-ity and flexibility.

Markets operate in an atmosphere of uncertainty. Trading signals are clear in the middle of the chart, but as you get closer to the right edge, you find yourself in what John Keegan, the great military historian, called "the fog of war." There is no certainty, only odds. Here you have two goals-to make money and to learn. Win or lose, you have to gain knowledge from a trade in order to be a better trader tomorrow. Scan your fundamental information, read technical signals, implement your rules of money management and risk control. Now you are ready to pull the trigger. Go!