As Discussed in previous Chapters fundamental and technical analysis are two very different approaches. The fundamental analysis approach involves measuring the company’s current performance and other financial statements. It also involves knowing the current sectoral information and other news related to the nation’s important decisions. All these factors add up to picking up a perfect match for the portfolio.
The technical analysis is less news and company’s statements. It is more focused on the company’s stock specific movements. Technical analysis requires a closer look into the various graphical movements of the stock. It also considers taking various statistical patterns and methods to evaluate the future movement of the stock. The reason to keep these parameters is that in the long run the company performs based on the news and its performance. But in the short run the stock movements earn quick bucks to the traders.
Selection of stocks varies based on the approach used. Let’s start to understand the methods from basics.
Stock Picking For Fundamental Analysis
The elements described in Chapter 3 aid in the stock picking procedure.
NEWS And Situation
The most basic element is news based selection. Lets understand this by an example. For instance let’s consider the current situation. In India the situation explains that electric vehicles would be the future of the automobile industry. With the infusion of Tesla and many Electric giants in India there is increasing production and increasing market share of electric vehicles.
It’s common knowledge that vehicles with green number plates are electric vehicles. The playing of electric vehicles has already begun in India. This reflects the opportunity for companies such as Amaraja batteries and Exide to grow their business. The reason is importing batteries from outside would be more costly for manufacturing companies. Hence battery companies can aid the automobile in producing cars at cheaper costs. This is news based and situation based analysis which triggers that one should invest into battery companies for long term gains.
Industrial and Sectoral Evaluation
It’s necessary to analyse the entire market situation before investing or else the amount gets stuck in the equities. The industrial evaluation means knowing everything about a particular industry as in Oil or Automobile or Gas or Energy Production or Consumer Products etc. This way one can get to know about the different industrial overviews. Sectoral Evaluation is a detailed analysis of every company in that sector (industry). This is important to know which company to invest into when the industry is chosen.
Let’s take an example for this instance. In the recent COVID situation the major advantage lies in the hands of the pharma companies. This is to say that the pharma companies have no shortage of business and their turnover is constantly increasing. Also in this situation one thing that people realised is that the pharma industry will never shut its business for the next decade neither will their business decrease.
The simple logic applied is that there are companies such as Reddy who have the vaccine in their hands along with the production of remdesivir. On the other hand Glenmark has Frapivir medicine. Companies like Cipla, Zydus etc. also have remdesivir production facilities. With the current situation one thing’s sure that the Indian turnover for these companies is going to boost up and this will increase revenue and profits all together, hence one should think to invest in such colonies for a decade.
Financial Statements and Financial Ratios
Financial Statements aid in knowing the resources of the company. Once you know which industry to invest into the comparison of sectors begins with ratios and statement analysis. With better cash flows any emergency can be met. Sometimes additional piles up of resources also aid in the direction of expansion and prediction of future plans like merger and acquisition or product line expansion. The best example for this year around Jubilant food introducing its new restaurant chain. The company entered the restaurant business for Biryani which moved its share price through the roof in one single day. Also the signal was given through the director’s report and reserves kept.
Ratios are a check on the continuous company performance. If you have invested in a company the way you get assured of investment is by better ratio presentation. Also if a penny company is under debt and has started performing well it can be indicated through ratios. This helps in picking up undervalued companies and making healthy investments into such companies.
Stock Picking For Technical Analysis
Technical overview that most small traders use is result announcements (Bajaj Finance and Adani Ports) and short term news (Dr. Reddy’s vaccine approval, Flight permission and INDIGO).
It is the standard practise for major investment and trading firms. Nowadays the retail investors use it as well. What news to be done is to analyse the markets and set up some parameters that a trader wants in case of picking stocks. Everything happens in an automatic manner and the software performs trade on behalf of the trader. If a person wants to pick up a nifty50 company + low debt + increased buying flow in recent trend + around the support and resistance levels. All this is possible with one single code. Once the parameters are set and buying range and selling range is set the trades perform automatically.
For more information on The future of Algo trading visit this link. The best site for algo trading in India is Zerodha Streak.
Using Chart patterns (Candlestick patterns)
The candlestick patterns present the trend reversal and trendsetting moments in a stock. This means that the entry and exit points are provided through candlestick patterns. The most important patterns are Three black crows, Three line strike, Abandoned baby, evening star etc. The patterns present a better prediction about the future movements. The trades can be done when such patterns are seen *(but always with SL points in place)*. Price action theory is also related to such patterns. When such patterns are formed the stock price actions tend to become volatile as the Algo capture such movements and execute automatic trades. Hence the entire technical analysis is based on a constant cycle of demand and supply.
Now for instance when the share price of Dr. Reddy increased for 300 Rs in 2 days with its vaccine news it formed an evening star patterns & that was indication of buying for that script.
Stock market indicators are nothing else but support systems for any decision of traders. They are handy to form different patterns on basis of historical data so that the entry and exit points can be known in any trade. By the exact analysis of any indicator it is possible to attain maximum profit. From Dow jones live to Nifty every stock in any market or any index can be analyzed using these stock market economic indicators. Due to the significance of the indicators nowadays any discount broker gives free technical analysis tools on its trading platform.
For the best explanation of buying stocks based on indicators one can relate to the link. Here the most important indicators and their usage are provided via 2 chapters.
USING STOCK SCREENER APPLICATIONS
Stock edge is a very much accessed online application which provides data on FII and DII data. It also provides sector and company wise details in terse manner. Simply Wall Street is one of the best websites I have come across personally. It consists of all the details of the company since its inception along with the future plans and every 0ther detail. Such applications help to understand the companies and market in a better manner.
Zerodha has tied up with one such application known as Trading view. Where one can analyse the charts and indicators and also set parameters for trading. Its handy for fundamentals as well as technical mode of trading.