Technical vs Fundamental Trading

Today I will discuss the difference between technical and fundamental trading. First of all, technical trading based on technical analysis or technical trading is mainly concerned with the price movement of a security using the charts and technical studies to predict potential price movements. While fundamental trading, looks at fundamental analysis mainly based on specific economic factors, or “fundamentals,” which makes up the basis for fundamental trading.

Fundamental Trading

Fundamental analysis looks at specific financial data of the company behind the stock to determine whether the company’s business activity will result in a higher or lower stock price. This financial data would include company revenues, profits and losses and business trends, as well as growth factors that will affect the future stock price. Fundamental analysis may also look at broader macroeconomic factors such as the business sector and the overall economy in relation to a company’s area of business. Fundamental analysis is geared toward understanding the company behind the stock. Some of the specific factors fundamental traders focus on when doing fundamental analysis are can be broken down into 2 general categories:

  1. General economic factors such as Supply and Demand and other economy new and specific industry factors.
  1. Specific data including such things as Price/Earnings ratios, Price/Sales ratios, Price/book value rations, etc. Profitability: looking at gross sales, gross profit margin, operating margins, earning per share, and net profit margin. Also, factors like growth rates, Potential revenue growth, financial strength, returns on investments and return on assets. Sometimes these many company specific factors are complicated and difficult to understand.

Fundamental Trading is generally reserved for more of a “buy and hold” style of trading as the investor is looking for long-term value.

Technical Trading

Technical trading on the other hand looks at price action using charts patterns and technical indicators to determine potential price movements. The theory behind technical trading is that all information about a stock is built into or factored into the share price and therefore analyzing the price movements will help predict where a stock price might go.

Technical analysis is appealing to more of a shorter-term swing traders as opposed to fundamental longer term buy and hold strategies, and has become more popular in recent years, due the fact that trading systems can be developed with a specific set of rules to trigger buy and sell orders. There is also a wide range of indicators for a trader to choose from, allowing the trader to set up a trading system to fit his or her trading style.

In conclusion, there is a place for both kinds of analysis in short-term trading, I definitely prefer a technical approach to trading, where you can analyze price movement and be in and out of the market, as opposed to longer term fundamental trading which leaves you investing for longer term moves based on fundamental values. With Technical Trading you should use a trading plan based on charts using simple technical indicators, but also maintain an awareness of basic fundamental factors, especially broad economic factors, which may affect a specific stock or specific industry that you might be invested in.

No Trades? What to Do…

This might sound like an unusual topic to discuss, but it is an important discussion to have. There are times when the market does not give us the setups we are looking for to actually enter a trade. In times like, this we need to know what we can do with our time. Instead of trying to force trades, we should be looking for ways to improve what we are currently doing.

In our article today we are going to suggest a few things that you can do when the market is less tradable.

The first thing you can do is to take some time to review your trading rules. Trading rules are the foundation of any successful trading and need to be reviewed and updated regularly. When there are no trades presenting themselves, you can go back and make sure you’re following the setups and entries like you’re supposed to. You can go through what your setup rules are to make sure you can see them clearly on the charts. You can analyze your entry trigger to make sure you are still following it as well as your exit rules. This does not take a lot of time, but it’s important to regularly review your rules.

Another thing you can do is to go back and review your trading journal. Look back at your more recent trades to make sure you were following your rules. This is a good way to analyze your trading mindset to make sure you are being disciplined and able to follow your trading rules. If you do not have a trading journal, this is a good time to put one together.

Reviewing the upcoming news is something that you can do when the market is quiet. Knowing what news is coming out can prepare you for the time when the market may get more tradable. News can be found on most broker sites, so make sure you know where to find it.

One of the most important things you can do is to evaluate your trading statistics. Knowing what your win:loss ratio is will allow you to see how well you’re doing with your trading strategy. In conjunction with this, you should also know your average win:average loss ratio so you can see if you’re exiting your trade properly. Often times, if your average loss is big, it is because you have let a few of your trades run to big losses. Knowing these important ratios will help you know where you can focus on improving.

There are many other things you can do when the market is not giving us trading opportunities. Take some time to list out what you can do so you avoid the urge to just trade to be trading. Knowing when not to trade is, often times, just as important as knowing when to trade. By practicing restraint in taking a trade, it will help you avoid trading when the market is less reliable. Make sure you have your list ready so you know what to do.