Fundamental or Technical Analysis to trade Stocks

The stock market refers to both stocks and stock indices.  Many people think of the Dow Industrial average of the DAX or FTSE when you talk about the stock market. There are several ways to generate profits by trading the stock market.  The first step would be to develop a short-term strategy. While buying and holding stocks over the long term will provide you with gains, there will be several pullbacks that might alter your financial goals. Using a combination of technical and fundamental analysis, you can develop some robust short-term trading strategies.

Fundamental or Technical Analysis

Fundamental analysis helps you determine if all the current information is incorporated into the price of a stock or an index.  When new information becomes available, it is immediately priced into a stock. This type of information could be macro, such as economic data, or micro, such as an earnings release or future guidance by a company.  You can follow economic and earnings releases by using a financial calendar.

Technical Analysis is the study of historical price action. If all the current information is incorporated into the price of a stock, then without any new information, the price will flow with market sentiment. By using technical analysis, you can determine support and resistance levels, trends, patterns and momentum.

Short-term Trading Strategies

There are several technical analysis trading strategies that you can use to develop a short-term trading strategy.  Trend following, mean reversion and momentum are some popular strategies that you can use to trade stocks.

A trend is a movement in the price of a stock that continues to perpetuate. To find a trend, you usually must wait until it starts. One of the best trend-following methods is the moving average crossover. Here you are waiting for a short-term moving average to cross above or below a medium-term momentum average. For example, when the 5-day moving average crosses above or below the 20-day moving average a buy or sell signal is generated. This strategy can notch up some powerful short-term gains when the price of a stock is trending but can be difficult to trade when the stock price is moving sideways.

A second strategy focuses on choppy market conditions and takes advantage of a stock reverting back to the mean. This strategy uses the fast stochastic. The fast stochastic is a momentum oscillator that measures overbought and oversold levels as well as generates crossover signals. When a crossover signal is generated and the fast stochastic is above the 80-index level, momentum has changed and its time to speculator that the price of a stock will fall. When a crossover signal occurs and the index is below 20, its time to purchase a stock.

A third short term trading strategy focuses on momentum. The MACD (moving average convergence divergence) index can be used in 2-ways. When a crossover buys or sell signal is generated using the MACD line or a crossover buy and sell signal using the MACD histogram.

All of these short-term trading strategies provide you with entry points, but you will need to develop a risk management platform to make them complete.

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Emily Brantly

About the Author: Emily Brantly

Emily Brantly is a freelance writer and blogger who is passionate about music, movies and books. She enjoys writing reviews and covering stories related to the entertainment industry. Email: [email protected]