Happy Friday. Let’s get right to a couple of great questions from this week’s mailbag…

Hi Jeff, I am a new-ish subscriber to your letter. I wanted to reach out and ask why you trust technical indicators so much. Specifically, why you use things like the 9-day exponential moving average (EMA), Bollinger Bands, etc. regularly when making suggestions.

I write because I have read numerous back-testing reports relating to these technical indicators. MOST technical indicators were ineffective. 95% underperformed the market and some even blew up the portfolio. I note that I generally despise technical indicators (they should be the last resort for investment decisions, not a first line of assessment).

Anyway, I look forward to hearing your response. Regards.

– Charles

Thanks for the question, Charles.

Technical analysis (TA) is much more of an art than a science. If you try to force it to conform to strict rules and formulas, it will be wrong almost all the time.

Try thinking of TA the way I do… a chart of a stock (or index) and its technical indicators is an emotional picture of the stock at a specific moment in time. If I can go back in that picture and find a time where the conditions were similar, and note how the chart behaved afterwards, it can provide strong clues as to what to expect in the future.

But TA is emotional. It evolves. So, conditions that used to provide a catalyst for a big move or reversal may need to get more extreme to cause a similar movement the next time.

Think about it this way…

When I first got married, I’d often come home from work, take off my socks, and drop them on the floor next to the couch in the living room. My wife would come home, see my socks on the floor, and get all ticked off about it. This happened over and over again.

Eventually, though, my wife got a little better about dealing with her slob of a husband, and I got a little better about not leaving my socks next to the couch. Leaving my socks on the floor no longer elicited the same reaction from my wife.

She still had the same emotions. But she had adapted. She had evolved. She would need a bigger catalyst before getting upset with me – like when she found a dozen pairs of dirty socks tucked underneath the sofa.

Here’s my point…

A lot of my trading strategy revolves around finding emotionally overbought/oversold conditions that are ready to reverse. TA helps me identify conditions where investors’ emotions have gotten extreme, and where I can see how stocks have reacted to similar conditions in the past. But you can’t force the indicators into a strict formula. You have to give them some wiggle room.

You can read my essays on gold, the S&P 500, and high-yield bonds over just the past few weeks and see how accurate the comments are/were. That was all based on technical analysis.

Jeff I've seen a few offers to join your Delta Report before but can it really be beneficial to a beginner with limited capital (but who REALLY needs to grow it in the next 1-2 years)?

– Stephen

Hi Stephen. I write this with as much humility as possible… There are some tremendous benefits to being a Delta Report subscriber. The educational resources alone, like the 8-part video series and the library of special reports, are worth the price of the subscription.

But, you want to know if it makes sense for somebody with a “limited portfolio.”

Please read my August 4 Market Minute essay outlining my ideal portfolio strategy. In that essay I used a $100,000 portfolio as an example. Really, though, I think as long as you have a large enough portfolio to employ both trading strategies (selling uncovered puts and buying speculative options) and enough money to diversify among several trades, you should benefit from a subscription. In my mind, that means you have at least a $20,000 portfolio.

Of course, it is possible to succeed with less. But you have very little room for error.

On a separate note…

Let’s talk about what you put in parentheses… “(but who REALLY needs to grow it in the next 1-2 years)”

Stephen, there’s a certain desperation in that comment. And I can tell you from experience, desperation combined with limited resources is a recipe for trading losses.

You’re more likely to commit all the classic mistakes of beginning traders. You’ll focus only on the speculative trades and ignore the conservative uncovered put option recommendations. You’ll take position sizes that are far too large for your portfolio. You’ll take on trades that don’t meet your criteria because you “have to do something.” You’ll watch every tick of the trade – up and down – and constantly second-guess the strategy. And, eventually, you will blow up your account.

I don’t want to see that happen to you (or anybody).

The basic philosophy behind my trading style is to use the gains from conservative trades (like selling uncovered puts) – which can sometimes be 20-25% per month – and use that to fund the speculative option purchases. That way we’re never in a situation where one bad trade, or even several bad trades in a row, will blow up the account.

You know your situation far better than I do. So, if you have the resources and can utilize the full strategy we use in the Delta Report, then you’ll definitely benefit as a subscriber. You can find out more about how to subscribe by clicking here…

And finally… just a quick personal note…

Thank you to everyone who sent in positive feedback about me spending time with my wife and kids this summer. I read every note. Many of the comments made me laugh. A couple stories just about made me cry. And every one of them warmed my heart.

I am blessed to have so many wonderful folks reading my stuff. You are awesome.

Best regards and good trading,

Jeff Clark

P.S. If you have a question about option trading you'd like to be featured in one of our Friday Mailbag issues, send me an email right here.