Why Fundamental Analysis is Still Relevant for Day Traders

Day traders rely on technical analysis more than fundamental analysis, but that doesn’t mean they shouldn’t learn how to perform fundamental analysis of securities. It’s absolutely essential if they want to consider longer-term trading, but it can help day traders make decisions when historical data is involved.

What is Fundamental Analysis?

Fundamental analysis involves finding the basic, or fundamental, price of a stock – the amount at which the stock should trade. That means researching everything to do with the company’s value and how it is affected. Start out with the company’s financial information, and search for the hard, objective data. Also look at the company’s historic data and any public announcements by management about the company’s outlook. Day traders may find fundamental analysis relevant to their decisions when it comes to patterns. For example, if a certain company report is due in day or so, the movement pattern is likely to resemble the prior pattern to the announcement of this information.

What is Efficient Market Hypothesis?

Developed in the 1960s, the efficient market hypothesis theory is quite straightforward. It posits that investors should know all relevant information concerning a company. Based on this information, they can then act on it. These investors actions lead to accurate share prices for the security. While the theory makes sense, there is a major drawback. The hypothesis only works if all information is public and readily available. Obviously, there is information that companies wish to keep private – even if doing so is illegal – and much relevant information is available from financial institutions only for those willing to pay for it.

Important Factors to Note in a Company’s Financial Statements

A company’s financial statements should provide the bulk of the information necessary to perform a thorough analysis. Here’s what to look for when perusing these statements:

  • Prior-year cash flow
  • Growth rate
  • Cash flow
  • Discount factor
  • Cash flow in year five
  • Growth Rate
  • Value at the end of year 5

Drawbacks of Fundamental and Technical Analysis

Day traders are not looking at the intrinsic value of a security. Instead, they view the security as a trading vehicle and focus on its potential performance in a particular 24-hour period. For this reason, fundamental analysis makes little difference in a day trader’s success or failure. However, the trader can inform the long-term investor that while fundamental analysis is necessary for their investment purposes, the overall vagaries of the market require consideration. Technical analysis, crucial for day traders, involves a learning curve. Since there are so many technical tools to choose from, it takes time for the trader to find the best fit for their personality and trading style, and their ability to intuit a particular type of chart. Another drawback – technical analysis does not focus on macroeconomic trends. Technical charts may not accurately foretell the results of a major development in an industry.

The SureTrader Advantage

Exploring fundamental analysis and understanding financial statements can help day traders make more educated decisions on whether to buy or sell a stock. SureTrader’s stock trading simulator allows you to test your theories while making paper trades, avoiding costly mistakes. Along with our state-of-the-art platform, 10,000+ stocks for shorting and 6:1 intraday leverage, that’s just one more part of the SureTrader advantage.

*This article is for informational purposes only

stock chart

Why Fundamental Analysis is Still Relevant for Day Traders

Why Fundamental Analysis is Still Relevant for Day Traders

Day traders rely on technical analysis more than fundamental analysis, but that doesn’t mean they shouldn’t learn how to perform fundamental analysis of securities. It’s absolutely essential if they want to consider longer-term trading, but it can help day traders make decisions when historical data is involved.

What is Fundamental Analysis?

Fundamental analysis involves finding the basic, or fundamental, price of a stock – the amount at which the stock should trade. That means researching everything to do with the company’s value and how it is affected. Start out with the company’s financial information, and search for the hard, objective data. Also look at the company’s historic data and any public announcements by management about the company’s outlook. Day traders may find fundamental analysis relevant to their decisions when it comes to patterns. For example, if a certain company report is due in day or so, the movement pattern is likely to resemble the prior pattern to the announcement of this information.

What is Efficient Market Hypothesis?

Developed in the 1960s, the efficient market hypothesis theory is quite straightforward. It posits that investors should know all relevant information concerning a company. Based on this information, they can then act on it. These investors actions lead to accurate share prices for the security. While the theory makes sense, there is a major drawback. The hypothesis only works if all information is public and readily available. Obviously, there is information that companies wish to keep private – even if doing so is illegal – and much relevant information is available from financial institutions only for those willing to pay for it.

Important Factors to Note in a Company’s Financial Statements

A company’s financial statements should provide the bulk of the information necessary to perform a thorough analysis. Here’s what to look for when perusing these statements:

  • Prior-year cash flow
  • Growth rate
  • Cash flow
  • Discount factor
  • Cash flow in year five
  • Growth Rate
  • Value at the end of year 5

Drawbacks of Fundamental and Technical Analysis

Day traders are not looking at the intrinsic value of a security. Instead, they view the security as a trading vehicle and focus on its potential performance in a particular 24-hour period. For this reason, fundamental analysis makes little difference in a day trader’s success or failure. However, the trader can inform the long-term investor that while fundamental analysis is necessary for their investment purposes, the overall vagaries of the market require consideration. Technical analysis, crucial for day traders, involves a learning curve. Since there are so many technical tools to choose from, it takes time for the trader to find the best fit for their personality and trading style, and their ability to intuit a particular type of chart. Another drawback – technical analysis does not focus on macroeconomic trends. Technical charts may not accurately foretell the results of a major development in an industry.

The SureTrader Advantage

Exploring fundamental analysis and understanding financial statements can help day traders make more educated decisions on whether to buy or sell a stock. SureTrader’s stock trading simulator allows you to test your theories while making paper trades, avoiding costly mistakes. Along with our state-of-the-art platform, 10,000+ stocks for shorting and 6:1 intraday leverage, that’s just one more part of the SureTrader advantage.

*This article is for informational purposes only