From the first moment a person ever considers investing or trading stocks he is confronted by three different aspects to what he is attempting:
1) Fundamental Information about the Company and the Technical Interpretation of Price Information and the how they relate to stock price movements,
2) Money Management, and
3) The Mental Aspect.
It is important to know something about each and what effect each has on your ability to be successful.
Fundamental Analysis: I am starting with this one, as it is usually the first and seemingly most logical one a new trader hears about and pays most attention to. In reality it is full of subjective views and complex almost incomprehensible economics formulas and influences. It is subject to constant manipulation and false information of all sorts none the least of which are self serving brokerage recommendations.
PE ratios are sometimes the rage, also analysts who supposedly have the researched information on companies, an avalanche of advisors on web sites, company statements, news releases and earnings. Information on insider selling, ratings as to earnings grouped with industry leaders or based on their standing in their industry all are bits of information often looked at by those starting to invest.
Market capitalization, stock share floats, insider trading and news of all sorts also figure in routinely to the new traders research regimen.
An example of the evaluation of Fundamental information:A favorite commercial of mine is a new investor studious at his computer, believing in these new ways of evaluating his investments and his son comes in and interrupts him and Dad says he’s researching to better invest money for the child’s college fund. He says this one has a P/E of 23. The kid then asks him - Is that good? And gets a blank stare from his father.The question has to be asked.
What does this type of information all really mean for the stock trader? There is no pat easy answer though. Many investors and traders who are a little more experienced would have their answer in place and say yes or no. However many stocks with a high P/E ratio or no earnings at all have been known to show incredible gains on speculation. Then for seemingly no reason the same stock sometimes loses all its price gains despite an upturn in earnings or a lower PE.
There are formulas that isolate stocks that are likely to have price gains. There are systems worked out on the basis of fundamentals whether a company is more or less likely to gain or lose value sometime in the future. These are widely available on the internet and in numerous books on investing. Investors Business Daily for instance has a rather well respected system for doing so. I am not going to compare the merits of each factor or system now, but fundamentals routinely affect stock prices, and knowing about earnings dates and which stocks are in which sectors etc. is useful even to the trader who works almost exclusively with charts.
Technical Analysis:There are literally hundreds of technical indicators that investors and traders use. There are thousands of ways to combine these indicators into a system that gives the stock chartist or technical trader buy and sell signals. The Million dollar question seems to be - which to use and how? An abundance of information exists on the smallest detail of technical analysis of stocks. It is not necessary to involve yourself in overly complex issues when deciding which of these will work for you.
Learn the basics of Technical Analysis. Test these in real time situations to ensure they are an aid to you in profiting from trades. Gain confidence in indicators you consistently see improved results from and don’t change how you trade so frequently that you do not know what works well in different market environments. You don’t have to come up with a new and unique approach, one that even you don’t understand. Ensure however that the indicators you are using are working well for your style in the current market you are trading in.
(#2 and #3 above will be covered in a series of articles and are as important or more so that #1)
