Fundamentals For Novice Traders

September 21, 2018 at 4:15 PM Leave a comment

Trading is defined as the participation in financial markets with the aim of benefiting from short-term moves and fluctuations in these markets to drive profits. In contrast to traditional buy-and-hold investing, trading is generally focused on real-time stock movements. Traders anticipate markets rising and falling, and buy and sell within hours, minutes and even seconds to profit from it. This is in contrast to traditional investors, who adopt a broader, long-term outlook.

Trading styles

The task of becoming a successful trader can be daunting, so it is important to learn a few fundamentals and have a robust strategy in place. Trading is skewed towards short-term gains, but traders do not have to close within a single day. It is also possible to hold onto securities and positions for weeks and months at a time. These time frames will help you to understand the tools you have at your disposal. There are four primary trading styles:

  • “Scalp trading” is the most active form of day trading as positions are generally only held for minutes and seconds. This form of trading is underscored by the belief that small moves in the market are easier to track than larger ones. Traders can make hundreds of trades during a session, so precision timing is required. It is a risky format as small gains can be wiped out by just one or two poor moves.
  • Day trading” is a style where traders operate “within the day” – hence the term “intraday”. Traders enter and exit trades on a single day and close them before the final bell. The fact that positions are not held overnight reduces out-of-hours risk factors. Day traders also trade with margin to maximize leverage.
  • “Swing trading” is a longer form of trading where positions last days or weeks. Traders use technical analysis and price action to benefit from short-term moves. There is less focus on fundamentals.
  • “Position trading” is the style that closely resembles traditional investing. Positions can be held for years.

Leverage and margin

Margin and leverage are two important concepts for traders to get to grips with. Buying on margin is using a broker to borrow money for stock purchases. It is similar to a normal loan. Marginable securities act as collateral when buying on margin, and interest also has to be paid, though this is not as much of an issue when pursuing short-term styles such as scalping. The longer an investment is held, the greater the return required to make a profit.

Margin feeds into leverage as the former is used to create leverage. An approved account is needed to use margin, and leverage is defined as the buying power available to account holders. More leverage allows an investor to pay less than expected for a trade.

Fundamental analysis

Fundamental analysis is a central pillar in the trading process. It is a method of evaluation. Traders take an in-depth look at a security or company to determine its performance and intrinsic value. There are a range of factors that should be examined during the process, including financial and economic, and quantitative and qualitative.

All of this will help a trader to decide whether a security is undervalued or overvalued. Comparing this analysis with the current price supports better decision-making. Weak securities are best suited to short bets, while strong companies are ideal for long bets. A stock feed can underpin fundamental analysis. Novice traders should always use up-to-date and relevant news, information, statements and reports.

Quantitative and qualitative

Fundamentals is a term that is difficult to define, but they are typically made up of two distinct categories: quantitative and qualitative. How do these categories differ?

  • Financial statements are the primary source of quantitative analysis. Making sense of numbers can be a huge boon for traders. These statements include balance sheets, cash flow statements and income statements.
  • A balance sheet provides a unique snapshot of a company’s status as it lists equity, liabilities and assets.
  • An income statement provides information about the financial performance of a company, balancing revenues and expenses and showing profits and losses for a particular period.
  • A cash flow statement is a quarterly or fiscal year overview of the cash that flows in and out of a company. Activities include operating cash flow (OCF), cash from investing (CFI) and cash from financing (CFF).
  • Quantitative analysis focuses on less tangible factors such as a company’s brand power or management style.

As evidenced by the previous section, the world of trading is anchored by vast amounts of information and data, so traders need to learn how to use charts to keep track of everything and make smart choices. Traders should also know how to limit risk, automate strategies, and keep on top of taxes and record-keeping.

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