An Introduction to Trading Types: Fundamental Traders

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10 Nov, 2021

7 min read

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Fundamental trading is a strategy of determining which stock to buy and when to acquire it by focusing on company-specific events. Fundamental trading is more closely associated with a buy-and-hold approach. Here is an explanatory note about Trading types.

Introduction

Navigating the stock market can be difficult for beginners and those new to the markets. Even traders who have experience might falter on occasion as the markets are volatile and unpredictable. This article seeks to shed light on fundamental trading, traders that engage in the same along with other pertinent information.

A Brief Overview

Fundamental trading calls on traders to be attuned to company-pertinent events in order to ascertain what stock ought to be purchased and at what point in time. Trading with reference to fundamentals is closely tethered to the buy-and-hold strategy as opposed to short-term trading. That being said, certain scenarios allow for trading with the aid of fundamentals to yield significant profits in small time frames.

Examining the Bigger Picture - Forms of Traders

Fundamental traders constitute one of several forms of equity traders. The main forms of equity trading constitute the following.

Fundamental Trading – Fundamental traders partake in trading keeping in mind a fundamental analysis of varied companies. This involves an examination of corporate events including actual as well hoped for earnings reports, acquisitions, reorganization and/ or stock splits.

Swing Trading – These traders are a form of fundamental traders that cling to their positions for periods that extend beyond a single day. A large number of fundamental traders do in fact engage in swing trading. This is owed to the fact that changes made to corporate fundamentals ordinarily need a number of days if not weeks to result in price movements that are adequate for a trader to derive a decent profit.

Scalping – Scalpers who partake in scalping making several dozen if not hundreds of trades each day in a bid to “scalp” a modest profit via each of their trades by taking advantage of the bid-ask spread.

Momentum Trading – Traders involved with this type of trading, eye stocks that predominantly move in one direction in large numbers. Such traders aim to coast on the momentum to acquire a profit they desire.

Technical Trading – This form of trading makes use of charts and graphs. Stock and index graphs are analysed to scope out any instances of converging or diverging which might be indicative of times to buy or sell.

While those new to the realm of trading may attempt to incorporate each of these techniques, they should ideally stick with a single one. This selected technique should match their investing capabilities including their knowledge and experience and which they should be willing to invest more time, research, practice and education into.

Making Sense of Fundamental Data and Trading

A large number of equity investors are familiar with the most frequently used financial data that is employed under fundamental analysis. This includes but isn’t limited to earnings per share, cash flow and revenue.

Serving as quantitative elements, they include figures that are featured on a given company’s earnings report, balance sheet and/ or cash flow statement. Equally important that may be considered are the results of financial ratios which include but aren’t limited to debt to equity and return on equity.

Fundamental traders employ this quantitative information such that they can ascertain opportunities to trade. These opportunities may vary but an example worth their while involves a company issuing their earnings results that the market wasn’t expecting.

Fundamental factors that are most pertinent to traders and investors alike pertain to earnings announcements along with analyst upgrades and downgrades. Being able to acquire this information prior to others, however, isn’t an easy feat as there are millions of traders and investors on the lookout for the same advantage.

Considering Earnings Announcements

The pre-announcement phase featured under these announcements is the most vital aspect here. This indicates whether or not the company will be able to meet, exceed or fail to meet its earnings expectations.

Traders are likely to occur right after this as short-term momentum opportunities are likely to arise.

Assessing Analyst Upgrades and Downgrades

Short-term trading opportunities are a possibility here especially in case of a stock being downgraded. Traders must be fast with their short selling as the dip in the price can be major.

Closely tethered to momentum trading, unexpected events are searched for that are understood to be the cause for the sudden movement in the price of a stock.

Speculative events that may not interest the majority of the market are of interest to fundamental traders here.

Conclusion

A number of trading strategists incorporate fancy models to conduct trades that are tethered to events prior to and following analyst upgrades and downgrades, acquisitions, takeovers, stock splits and reorganizations, earnings announcements.

Provided fundamental traders are able to accurately determine the present position of stocks and the consequent price movements that follow, they are likely to execute good trades.

Frequently Asked Questions

Q1. Name some popular trading strategies.
A1. Popular trading strategies include fundamental trading, momentum trading, scalping, swing trading and technical trading.

Q2. What are the two most important factors for fundamental trading?
A2. The two most important factors considered for fundamental trading include earnings announcements along with analyst upgrades and downgrades.

Q3. What is fundamental trading?
A3. Fundamental trading involves the fundamental analysis of varied companies. This involves an examination of corporate events including actual as well hoped-for earnings reports, acquisitions, reorganization and/ or stock splits.

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