Trading and Investment are two sides of a coin. Through This Journey of Various chapters we will decode the statement “LETS LEARN TRADING” (L.L.T).
Both Trading and Investing them have time frame differences between them. To focus on any one of them the entire strategy needs to be different. For Investment purposes one should only focus on fundamental analysis for perfect pick of stocks. For trading and short term holding purposes one should focus on technical analysis.
The reason is very simple yet very deep and intense.
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.
The first thing that anyone comes with is the word intrinsic value whenever a fundamental approach is taken. So let’s define this term. Intrinsic value is a calculation of the company’s future cash flows and other values. The calculation is done to get an accurate present value of the stock. This helps the investors to know what they are exactly investing into. What is the actual value of today and what could be the further upside after 3 to 5 years.
Any company a person invests into is for a long term of 3 to 5 years and more. The reason is in the long term any stock picks up when the news kicks in or when it performs better in a quarter. Hence for better return on investment into equities long term is the only way out.it is safer than trading due to daily fluctuations and also wise as slowly the wealth gains.
Now the most important factors that one should know about when adopting the fundamental way are :
- Thorough information about company’s performance and sectoral performance
- Daily NEWS which could affect the company in long run
- Financial Ratios and Intrinsic Valuation
- Industrial analysis
- Future of Sectors in which company is working
- Long term investment and holding capacity
The company’s performance is defined by its past three year’s returns and the company’s future plans. These things are always found in the previous company’s reports. The annual reports also contain information about the company’s product line and other income sources which helps to identify the potential of the company.
The sectoral performance is to be viewed after the selection of the company to keep track with other company’s performance in the same domain. This helps to identify change in company’s performance and pricing with inclusion of various news in the market.
NEWS need to be taken into consideration due to their effects on the demand of the company’s stock. Everyone is not an investor in the company but traders respond to such news. Such news drives the company’s price to new highs. The simple example can be explained with this year’s recent performance. The price of Dr. Reddy’s Labs increased more than 500 Rs in a constant run one week before the vaccine approval announcement. The day on which the vaccine was approved the stock grew more than 100 Rs in one single session. Hence the news drives the stock price to new highs. Hence one should invest in stocks which have better prospects for the future and are reacting to the news presented in the market.
If a stock reacts with the news in the market and stays parallel in growth and performance with stocks in the same sector then it can be considered a good stock to invest in.
These are the key indicators for selection of stocks. The history of which ratios strengthen the decision for picking up a stock. A detailed note of such ratios is presented in highlighted link BLOG.
Such ratios assist in selection of stocks. IF a company’s turnover ratio is increasing every quarter, then this identifies that the business is growing every year. If the P/E ratio is lower than the sector P/E it indicates a low valuation of the company in currency scenario. Such companies have high chances for better returns in the future. Hence ratios assist in the process of fundamentally picking the stocks.
While pursuing the technical approach it’s very important to note about the holding capacity of the person. The reason is more capacity, more risk on margins and better the returns. The technical analysis is done with a view of short term and quick gains. Nowadays people opt for algo trading as well. It is an automated system for trading. Here one needs to enter the parameters or areas important for picking up the stocks and the trades are initiated directly through the system.
The positions are taken by keeping in mind the price action movements of the stock. The charts and diagram also help to identify the pattern of the stock. This is important to gain knowledge about the exact entry and exit points of the stock. The statistical tools help in tracking the movements of the stock and also knowing the buying and selling patterns. It is very important to make a perfect mix of charts and tools to get the desired stock picks.
The important things to note in technical analysis are :
- Charts and their time frames
- Statistical tools
- Holding capacity and risk levels for margin
- Algo Trading
- Better News for any stock or sector
The charts are important due to the time frame feature. With the set time frame one can view the graphical pattern of a stock. With varied time frames it becomes easy to identify the price action of the stock. This makes the entry and exit decision simpler.
There are various indicators and different parameters available per indicator which identify the stock movement and demand and supply pattern. The indicators such as stochastic indicators help in knowing the overbought or oversold situation of a stock. The Ichimoku cloud is a very complex indicator which displays multiple actions of a stock. It indicates the price action, the entry and exit points, the volume of trading and future assumptions of a stock.
There are numerable such indicators which can be accessed as per the strategy. Such a list of indicators can be viewed in the highlighted link BLOG.
Algorithmic trading (Automated trading) is a legal trading practise in India since 2008. Today more than ⅓ of the stock market is involved in algorithmic trading techniques. Algorithmic trading in simple words is automatic trading by computers based on the preset parameters.
They include historical events, stock specific price movements, volatility, volume of stock trading, current market situation, risk appetite (margin), indicators and pattern identification, resistance and support levels, etc. Hence by coding all your specific requirements you can ask the computer or software to trade on your behalf if the price set by combination of your strategy gets hits.
Also there can be several test runs for knowing the efficiency of a strategy. Such a test run is known as Back-testing where you run your strategy against historical data and study the outcomes.