February 29, 2012
Using Fundamental And Technical Analysis In Trading
Sorry for the lack of posts recently. My long standing illness has been getting me down recently. Anyway I have two guest posts that you may find useful. The first one is entitled 'Using Fundamental And Technical Analysis In Trading' and is featured below, whilst the second one will be posted tomorrow. I hope you find them useful.
Fundamental analysis remains an essential part of formulating trading strategies for the majority of traders, regardless of whether its stocks, shares or commodities. The subject of fundamental analysis is incredibly broad with a wealth of information available to the novice and expert trader alike.
Generally speaking fundamental analysis will be used for trading stocks and shares, but where short-term trading strategies are prominent, such as FX trading, technical analysis will often be favoured. Of course, using a hybrid of both fundamental and technical analysis will ensure both bases are being covered and can often be the best approach for trading. Often this can apply to dealing in individual shares, especially big FTSE100 companies where trading is active.
Before selecting shares, people will often use quantitative analysis to get a basic overview of performance and is a good starting point for initial research. This will often involve examining revenue, assets, expenses, assets and all other financial aspects of a company. Of course, it’s important to understand how all this information relates together and time is spent learning about the balance sheet, income statement, cash flow statement etc.
For selecting shares often things like price-earnings ratio, price to cash flow, discount cash flow, return on equity, and dividend yield amongst other variables will come into consideration for quantitative analysis. Selection using this kind of analysis will usually be based on a set of shared characteristics for individual or group of shares.
Often traders will use such basic information as well as further in-depth analysis, such as the timing of crucial announcement’s pertaining to future success, or indeed, failure of the company and other technical analysis to formulate decisions on the best times to buy or sell.
Technical analysis is perhaps best used when the trader suspects there may be valuation anomalies, and provides a good way to delve deeper. It can help provide attribution to key technical indicators, as a way of avoiding excessive buying prices or getting the best price when it comes to exit. Such hybrid approaches work well with the trading of commodities and precious metals, as often fundamental analysis places an added emphasis on these.
There are often levels of complexity involved when it comes to trading in commodities, for example, and a variety of different variables that can have implications on prices and decisions. Some are psychologically related such as the motivations of other traders, whilst others may be geo-political. Bad weather in Ghana for example; political disturbances in a neighbouring country, a hike in shipping rates all may influence the price of trading commodities.
So one has to approach their analysis with careful consideration and often use in-depth technical analysis as well as fundamental analysis as best practice.
Article written on behalf of LMAX Exchange – FX trading