Technical or Fundamental Analysis for Day Trading?

Both technical and fundamental analysis can be used by day traders in the stock market. Some people prefer one method over the other. There is not a particular method that has been proven to be more effective. Fundamental analysis involves looking at the internal information of a company. Day traders that utilize fundamental analysis scour over financial statements of companies. They try to use valuation multiples in order to determine which companies are under-priced in the market. Traders who use this type of analysis like to watch financial news programs in order to pay attention to the latest announcements on companies. 

Technical Analysis

Technical analysis is typically the method that most day traders use when trading stocks. Technical analysis is a type of analysis that utilizes price charts as the main source of information. This is the type of day trader that has multiple screens going at once on their desktop so that they can see many charts at a glance. With technical analysis, traders try to identify profitable trading opportunities by looking at patterns in the stock charts. They will look at what the price has done recently, and try to predict what it will do in the future. Those that utilize pure technical analysis are not concerned with financial statements. They believe that the market is efficient and everything that they need to know is present in the price of the stock.

Choosing a Method

If you are considering which method to choose, you may have a difficult time making a decision. Both methods have some merit that can be useful when trading. Between the two, technical analysis may be more beneficial for true day traders. If you are day trading, this means that you are trying to profit from short-term movements in the market. A company could be in good shape financially according to the financial statements and still have a down day in the market. 

If you are looking for a way to identify small movements in the daily market, technical analysis will be a necessity. Technical analysts are trying to find smaller movements in the market and are not necessarily concerned with the long-term prospects of a company. Fundamental analysts generally have a better shot at finding companies that will be profitable over a long period of time. However, this method is not usually the best one to find profitable opportunities on a short-term basis. 

Combining Both Methods

Perhaps the best approach is to take elements of both technical and fundamental analysis when day trading the stock market. You can look at stock charts to try to find profitable trading patterns. Then, double check what you have found by paying attention to fundamental news announcements on these companies. This will keep you from overlooking key elements in your trading.

blog comments powered by Disqus