There are so many ways to pick the stock. For example, longer-term investors will use fundamental analysis. Because their focuses are on things like a company’s management structure, competitors, industry position, growth rate, growth potential, income, and revenues to try to determine if it is a good value. In order to make it easier to compare two companies with different share prices, a different number of shares outstanding, or just different corporate structures, there are many different key metrics.
Earnings per share, price-to-earnings ratio, price-to-earnings growth, and dividend yield have been developed over the years, side by side.
On the other side, shorter-term traders often rely on technical analysis. Their focuses are on patterns within stock charts as a way to try to forecast future pricing and volume trends.
As we explained earlier, technical analysis is based on the assumption that future patterns and movement will often be similar to previous patterns and movement.
Proponents of technical analysis believe that charts reflect all the information that is publicly known about a particular company, by those who are trading it. Their activities are directly reflected in how chart patterns come up.
Which of the two types of analysis takes on the greater importance? It is often determined largely by the time horizon of the strategy being considered.
Essentially, the longer-term strategy the greater the emphasis should be on fundamentals. Hence, the shorter-term strategy, the greater the emphasis should be on technical analysis..
Both forms of analysis are important. Ignoring either potentially overlook valuable information is not a good way to become a profitable trader. Let’s say, employing both forms of analysis on every trade makes sense.
Basically, by using both fundamental and technical analysis, shorter-term traders and longer-term investors may be able to improve their chances of success. By using fundamental factors they may select the candidate and by technical factors may dictate the ideal entry or exit price.
So, how can such models be used in order to make more informed trading decisions?
When entering into a position it is important to understand the market paradigm at the time of the decision with respect to the most relevant economic indicators.
For example, if an investor is trading the EUR/USD spread betting market then they should record the current situation and expectations for both economies
But the investor is making use of a daily chart.
Or for fundamental stock traders, this is the right place.
We will point some important information in this chart, important to analyze before making any decision. All are marked ‘red’
You see, the stock price tends to increase when the economy is doing well and tends to weaken when the economy is doing poorly.
Such stocks are usually those of companies that sell discretionary products and services that consumers buy more of when the economy is booming but cut back on during a recession.
Why is so important to read the news when trading?
For example, let’s put Allergan plc (AGN) stock into this equation and find out if it is a good choice for value-oriented investors right now.
Recently, FDA allowed to the other botox maker (You know that Allergan plc is botox maker, right?) to sell that product on the public. This approval sent Allergan’s shares to get down about 5 percent after the bell.
And this is marked on their market chart.
Can you see their drop down?
Suppose you correctly assumed 10 years ago that the use of a bottle will start to grow even more. You bought the Allergan stocks. And left them like that. Who will read the news about the botox and new trends? Top models, actors, people from the public scene or others obsessed with physical appearance. You? Certainly not.
But what happened?
You did not read that this botox maker got competition on the market. U.S. regulators approved cheaper treatment. And you made a loss because you didn’t read the articles about botox industry. But, if you had information about the new regulation, you would sell your package of Allergan plc stocks and earn money.
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The longer-term investors will use fundamental analysis to pick a stock
The stock price tends to increase when the economy is doing
Using both fundamental and technical analysis has an influence on investors