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Day traders use technical and fundamental analysis when trading securities. While technical analysis is used much more than fundamental analysis, both play a role in successful day trading. As traders hone their trading strategies they will discover which type of stock analysis best suites their purpose. The bottom line is that stock analysis, whether technical or fundamental, seeks to reveal future stock and market activity.
What is Technical Stock Analysis?
Day traders don’t focus on stock price per se with technical analysis. It’s a matter of focusing on the statistical analysis of the stock’s price movements. In essence, technical analysis involves predicting a stock price’s future direction by examining past data. Technical analysis requires a thorough understanding of technical charts. The use of technical charts and the examination of price and volume history reveal long-term patterns. Technical stock analysis looks at the way market factors affect a stock but not necessarily factors affecting the market. The latter is more the purview of fundamental analysis.
What is Fundamental Stock Analysis?
Unlike technical analysis, price is the primary focus with fundamental analysis making it nearly an opposite system. You want to find the fundamental, or intrinsic, value of the security. Anything that affects a company’s value is a component of fundamental analysis, whether that concerns major influences such as the overall economy or specific factors such as company management, revenue, earnings growth and profit margins. Rather than using technical charts, traders look for hard data for security evaluation. A company’s financial statements are the starting point.
Because day traders are interested in very short-term – 24 hours or less – gains and losses, fundamental analysis is not as crucial a tool. However, for longer-term traders, it’s an absolute necessity. Market legend, Warren Buffett relies heavily on fundamental analysis when choosing stocks.
Technical Analysis Tools
There’s no shortage of technical tools for day traders, therefore, the tools used boil down to experience and personal preference. Some technical tools will show basically the same information, so there is no need to use redundant indicators. For best results, rely on one of the indicators in each of these four sectors:
Oscillators – among the common tools, oscillators generally range from 0 to 100 with the former showing oversold conditions and the latter overbought conditions. The most popular oscillators include:
Volume indicators – volume indicators aren’t absolute necessities but they can help traders make decisions. Such indicators deal not only with volume but with price data to determine trend strength. The best-known volume indicators include:
Overlays – these indicators are the exception to the “choose one” rule, as different overlays serve different functions. They get their name because these indicators are found on the top of price bars and use the same price scales. The most commonly used overlays include:
Breadth indicators – these indicators show overall market sentiment, whether bullish or bearish. The most used breadth indicators include:
Using Technical Trading Strategies
Once a trader masters technical analysis tools, it’s time to use them and learn technical trading strategies. Familiarity with the top trading strategies allows a trader to find the best-suited method for his or her individual trading style. Here are the major technical trading strategies:
Breakout Stock Trading
With breakout stock trading, traders look for each security’s price resistance and support level. The former is indicative of a price the stock can’t quite reach and the latter, a price at which the stock does not go below. Breaching of that resistance point results in high volume trading. Traders must learn certain patterns in technical charts to seize an upward trend and capitalize on the breakout. Knowing the correct exit point is critical for this strategy.
Simple Moving Averages (SMA)
Sophisticated technical charting isn’t necessary for determining simple moving averages. SMAs are easy enough to figure out on a calculator. You do need to see the SMA on a chart to quickly determine trending and whether to buy or sell based on the SMA trend signal. There are many varieties of SMAs, but most pertain to specific timeframes that may involve weeks, days, hours or minutes.
Trading with trend strategies is relatively simple, but the key is the usage of a variety of indicators and analysis. Depending on a security’s direction, traders assume long position or short positions on a stock. For trend trading, you need SMAs, RSIs and volume measurements.
An easy strategy to master, trading with swing strategies begins with identifying the trend using candlestick charting. However, this is not a day trading strategy but a longer-term strategy. Once you’ve identified the trend, patience becomes a virtue as you wait for gains.
With range strategies, traders find a security’s support and resistance level with the help of oscillators. The stock is purchased at the overbought level and sold when close to the resistance level. Range trading works as either a short or long-term strategy, depending on the trader’s preference.
Using Fundamental Analysis
Whether you day trade or take a long-term approach, understanding and using fundamental analysis is critical. Fundamental analysis is really the foundation of investing and virtually every investment strategy uses it. Much of fundamental analysis involves number crunching and learning the nitty-gritty of a particular company through examination of its assets, liabilities, expenses, and revenues. If you enjoy doing research when investing – and no one should invest without researching a security – you’ll find fundamental analysis compelling. Used correctly, fundamental analysis is the best way to pick stocks – just ask Buffett.
Get started on your fundamental analysis by accessing and dissecting a company’s financial statements, especially the balance sheet, income statement and cash flow statement. Here’s what you’ll learn from perusing these documents:
Learn how to perform fundamental analysis by tracking a few stocks over two or three months. Do your homework and decide on the direction of the stock based on its fundamentals. After careful tracking for the three-month period, see how each stock fared compared with your analysis.
The SureTrader Advantage
SureTrader’s state-of-the-art platform offers top technical analysis tools for clients. Whether you’re a novice investor or have decades of experience, you’ll find our technical and charting tools second to none. Along with our low minimum balance and 6:1 leverage, our technical offerings are just another part of the SureTrader advantage.
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