Why You Shouldn’t Pay Attention To What a Company Does

In a recent AlphaShark article, I shared the following with you in slightly different language. Now, I have reworked this lesson to focus on a nuanced perspective.

When I was on the trading floor in Chicago and would take on a position in equity options, other traders would sometimes ask me, “What does that company do?”

My response was always the same: “Who cares!?”

It really didn’t matter to me what a company did, made or sold for me to trade it.

All of my trading was based on institutional order flow and unusual options activity. With this strategy, fundamentals really don’t matter that much.

As an AlphaShark, you should adopt the same point of view.

Below I discuss some of the main reasons to ignore fundamentals in your trading plan for many setups, and why you really shouldn’t care what a company does when you’re trading it.

Focus On Shorter Term Trades

This is probably the biggest reason for the “Who cares?” answer to the question about what a company does.

Fundamentals have a much larger impact on the long term outlook for a company and its stock.

But we focus on short and medium term trades. We want to make money fast, not slow.

That’s why AlphaShark trading setups are mostly short term trades or medium term swing trades. In this time frame, there are more important factors than fundamentals.

Supply and demand are the largest influences on a stock or options price in the very short term. This is especially true when trading around institutional order flow.

The aggressiveness of buyers and sellers determines the short term price of an asset. If buyers are more aggressive, the stock goes up. If sellers are more aggressive, the stock goes down.

Fundamentals simply aren’t a major factor on short term pricing.

A Large Institutional Bet Overrides Fundamental Weakness

When looking for trade setups, we typically look for large institutional order flow in the options market, and then structure a trade based on that.

That way, we can see where institutional traders are placing large amounts of risk capital.

For instance, when a trader places a $1 million bet that the price of a stock will rise, you should ignore the fundamentals and focus on technicals.

After all, an institutional trader that does this is clearly disregarding the fundamental case themselves, so why wouldn’t we?

This also underscores the earlier point about the aggressiveness of buyers and sellers.

Large institutional order flow shows extreme aggressiveness in buyers and is a great signal for a trade setup.

With these dynamics, fundamental analysis just isn’t necessary.

Fundamentals Matter In The Long Term!

In no way am I saying that fundamentals never matter.

If you’re investing for retirement and trying to build up a long term portfolio, you very much care about fundamentals.

But for our AlphaShark trading style and shorter holding periods, they just matter much less.

That’s the difference between trading a stock for short term profit and investing in a company for long term gain.

As an AlphaShark trader, you’re focused on short and medium term trading to make quick profits.

Remember this and you’ll be trading like an AlphaShark!

Regards,

Andrew Keene
AKA, “The Alpha Shark”

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In a recent AlphaShark article, I shared the following with you in slightly different language. Now, I have reworked this lesson to focus on a nuanced perspective. When I was on the trading floor in Chicago and would take on a position in equity options, other traders would sometimes ask me, “What does that company...

Andrew Keene

Andrew Keene is the editor of The Alpha Shark research desk at Agora Financial. That includes the daily Alpha Shark Scanner PRO, the monthly Alpha Shark Letter and the bi-weekly CryptoShark Trader. He’s also the founder of a seperate business called AlphaShark Trading which founded in 2011. Andrew’s worked as a proprietary trader at the...

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