If you have joined any stock options seminar recently, you might have noticed the frequent mention of technical analysis. This term is also popular among trading blogs all over the Internet and for the right reason: you understand stock options and how to choose from among them through technical analysis.
The Difference Between Fundamental and Technical Analysis
So that we can understand how to pick the right options, we have to understand how to analyze it first. Without good analysis, it is as if, you are just throwing away your money. There are two main categories of analysis, namely, fundamental analysis and technical analysis.
- Fundamental analysis
When you want to predict the future performance of great companies or its markets, you resort to fundamental analysis. In this case, you will be looking for fundamental data as loss and profit statements, earnings guidance and earnings growth and the like. The disadvantage of fundamental analysis is that even great companies experience downturn even for extended period of time and they don’t always have great stocks.
- Technical analysis
While you resort to fundamental analysis when you want to study the performance of a company, you resort to technical analysis when you want to study the exclusive performance of a stock. With technical analysis, you will deal with prices across different periods of time and volume transacted. Through this, you will know the performance of the stock regardless of the performance of the company and this will help you avoid those extended downturns that it experience.
Now why do you think that technical analysis is such a favorite among option traders? Well, you have to remember, that fundamental analysis is favorable for long term investing while technical analysis is great for short term ones. While stock traders can keep their stocks for like forever, options expire for a specific time period. In fact, options in most cases expire within a year and option traders often use…