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Advanced Trading Strategies

Fundamental analysis is the cornerstone of investing. The biggest part of fundamental analysis involves delving into the financial statements. Also known as quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and all the other financial aspects of a company.

Fundamental analysts look at this information to gain insight on a company’s future performance. But there is more than just number crunching when it comes to analyzing a company. This is where qualitative analysis comes in - the breakdown of all the intangible, difficult-to-measure aspects of a company.

 When talking about stocks, fundamental analysis is a technique that attempts to determine a security’s value by focusing on underlying factors that affect a company’s actual business and its future prospects.

 On a broader scope, you can perform fundamental analysis on industries or the economy as a whole. The term simply refers to the analysis of economic well-being of a financial entity as opposed to only its price movements.

 What purpose does Fundamental Analysis Serves?

Correctly speaking, Fundamental Analysis serves to answer questions, such as:

Is the company’s revenue growing?

Is the company actually churning profits?

Does the company hold strong position to beat out its competitors in the future?

Will the company be able to repay its debts?

The term Fundamental Analysis is used most often in the context of stocks, but you can perform Fundamental Analysis on any security; from a bond to a derivative. As long as you look at the economic fundamentals, you are doing Fundamental Analysis.

The various fundamental factors can be grouped into two categories viz, Quantitative and Qualitative.

Quantitative Factors are capable of being measured or expressed in numerical terms.

Qualitative Factors are related to or based on the quality or character of something, often as opposed to its size or quantity.

Know Technical Analysis

Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

There are also many different types of technical traders. Some rely on chart patterns; others use technical indicators and oscillators, while still others resort to combination of the two.

Unlike fundamental analysts, technical analysts don’t care whether a stock is undervalued. The only thing that matters is securities past trading data and what information this data can provide about where the security might move in the future.

Technical analysis takes a completely different approach; it doesn’t care one bit about the value of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market.

Despite all the fancy and exotic tools it employs, Technical Analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, Technical Analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components.

The field of Technical Analysis is based on four assumptions:

The market discounts everything.

Price moves in trends.

History tends to repeat itself.

Fundamental Analysis v/s Technical Analysis

At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements.

By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company’s value. In financial terms, a fundamental analyst attempts to measure a company’s intrinsic value.

Can Technical Analysis and Fundamental Analysis Co-Exist?

Although technical analysis and fundamental analysis are seen by many as polar opposites - the oil and water of investing - many market participants have experienced great success by combining the two.

For example, some fundamental analysts use technical analysis techniques to figure out the best time to enter into an undervalued security. Oftentimes, this situation occurs when the security is severely oversold. By timing entry into a security, the gains on the investment can be greatly improved.

Technical traders, on the other hand, believe there is no reason to analyze a company’s fundamentals because these are all accounted for in the stocks price. Technicians believe that all the information they need on a stock can be found in its charts.

Different Ways of Trading: An Insight

Ways of Technical Trading 

Study the Long Term Charts- A larger scale map of the market provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term market view alone can often be deceptive.

·        Determine the Trend and Follow it- Market trends come in many sizes viz, long-term, intermediate-term and short-term. First, determine which one you’re going to trade on and then use the appropriate chart. Make sure you trade in the direction of that trend. If you are day trading, then use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term chart for timing.

·         Find Support and Resistance levels i.e. Low and High Levels- The best place to buy a market is near support levels. The support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually the previous peak.

·     Draw Trend Lines- Trend lines are one of the simplest and most effective charting tools. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. The longer a trend line is in effect, and the greater number of times it has been tested, the more important it becomes.

        Follow Moving Averages- Moving averages provide objective buy and sell signals. They tell you if existing trend is still in motion and help confirm a trend change.

· Track Oscillators- Oscillators help identify overbought and oversold markets. While moving averages offer confirmation of a market trend change, oscillators often help warn us in advance that a market has rallied or fallen too far and will soon turn. Technical Analysis is a skill that improves with experience and study. Always be a student and keep learning.

 Fundamental Trading

To a fundamentalist, the market price of a stock tends to move towards its intrinsic value. If the intrinsic value of a stock is above the current market price, the investor would purchase the stock. However, if the investor found through analysis that the intrinsic value if a stock was below the market price for the stock, the investor would sell the stock from their portfolio or take a short position in the stock.

There are several steps associated with Fundamental Analysis. The investor must make an examination of the overall current and future health of the economy as a whole.

Attempt to determine the short, medium and long-term direction and level of interest rates. This may be done through interest rate forecasting. A fair understanding of the industry sector involved, including the maturity of the sector and any cyclical effects that the overall economy has on industry sector, is also necessary.

Once these steps have been undertaken, then the individual firm must be analyzed. This analysis must include the factors which gives the firm a competitive advantage in its sector (low cost producer, technological superiority, distribution channels, etc.). As well, an in-depth look at the firm must be undertaken. Furthermore, factors such as management experience and competence, history of performance, accuracy of forecasting revenues and costs, growth potential, etc., must be examined.

Investors may use Fundamental Analysis within different portfolio management styles.

Buy and hold investors believe that latching onto good businesses allows the investors asset to grow with the business. Fundamental Analysis lets them find good companies, so they lower their risk and probability of wipe-out.

 Managers may use Fundamental Analysis to correctly value good and bad companies. Even bad company’s stock goes up and down, creating opportunities for profits.

 Contrarian Investors distinguish in the short run, that the market is a voting machine, not a weighing machine. Fundamental analysis allows you to make your own decision on value, and ignore the market.

Value Investors restrict their attention to under-valued companies, believing that its hard to fall out of a ditch. The value comes from fundamental analysis.

Managers’ may use fundamental analysis to determine future growth rates for buying high priced growth stocks.

Managers may also include fundamental factors along with technical factors into computer models (quantitative analysis).

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