The difference between investing and position trading…
As you probably know by now, my approach to trading the markets is a mix of both technical and fundamental analysis.
This works for me well, since I take the best aspects of both analyses and apply them to form a view…
I have my main technical strategies, based on Wyckoff schematics and support and resistance principles (you can read more about my technical approach in the Trading Point Pro Welcome Guide here.)
But I always look at the fundamentals behind the asset, whether it’s looking at the wider economic picture when assessing a currency, or assessing the health of a company when looking at trading in shares.
However, one of my friends, who is also a trader purely trades off of fundamentals. He doesn’t do any technical analysis at all.
To do this, he position trades. This means that he is holding a position for a much longer time frame – normally in the time period of months not days or weeks. He has actually held an AUDUSD trade for a year once.
Most of his trades are on equities, as he finds that it is easier to apply a fundamental outlook to equities than assets more affected by macro events (like currencies), since it is easier to look at the industry environment.
When we met for a pint back in September though, he told me he doesn’t see himself as an “investor” – because he doesn’t care at all as to how the company does.
He doesn’t care about what dividends are being paid to him, he’s just purely speculating.
It also means that he doesn’t get ‘married’ to the trade… he has no bias toward company health. What this also allows him to do is trade around his position…
So as well as holding for the long term, he might have a crack at intraweek trading (both ways) the market, as well as adding to his longer term position at certain points.
This allows profit increases while keeping his base position – so his profit multiplies.
Let me be clear though, this isn’t that easy to do and does take experience… but above all, it takes patience, since you’re waiting for longer term price levels and news to retain the trend so you may add to your position.
Fundamental analysis on a stock – the basics…
Now, I’ve talked a lot about how I conduct technical analysis but I’ve not really covered a huge amount on how to conduct fundamental analysis.
And when it comes to trading things like shares in a company, fundamentals can be really important in building a strong trade idea.
So today, I want to provide you with a brief overview of the kind of fundamental analysis traders can do to formulate a strong case for trading a company.
The information below is taken from my recently published book, Retire Rich: How to Trade Your Way to £1,000 a Week…
“Fundamental analysts prefer to look at the financial data a company releases (usually twice per year, though some large company publish their accounts quarterly) in its Income Statement.
They also keep an eye on the news for any company announcements and indeed any other news that may affect the company, the sector the company is in and the wider economy (for example interest rate decisions).
Fundamental analysts are company information and news based traders – they rarely look at charts. But that doesn’t mean you get away from doing complicated data analysis – fundamental analysts can crunch a lot of numbers in the quest to find the best stocks to trade on.
Some questions fundamental analysts would ask are:
– What does the company do? Is there still an active demand for that type of company and the goods it sells?
– Is the company making money? Is the company making good profits? What are its costs and debt liabilities?
– Is it expanding? Has it grown from what it was before?
– What’s happening in the wider industry? What is its position in the sector and how does its performance rate against similar companies?
– What’s the company’s management like? Are there any fractions/discord between management and shareholders?
– Are there any merger/takeover plans afoot? Fundamental analysts will look at a company’s income statement (which outlines all the incomings and outgoings in the previous six/12 months) and the balance sheet (which gives you an overview of the company’s bottom line).
The income statement will include some (if not all) of following data:
– Turnover/Revenue: How much money the company made from sales of its goods.
– Other operating income: How much they made from other sources, if any.
– Gross profit/loss: This is the turnover minus the cost of making the goods sold.
– Administrative expenses: These are other overhead costs associated with running a business.
– Operating profit/loss: This is the net profit after all expenses have been taken away from revenue.
– Net finance charges: This is the interest paid on any debts the company has.
– Pre-tax profit: This is what you are left with when you subtract finance charges from operating profit/loss.
– Tax: How much tax the company paid
– Post tax profit/loss: This is the pre-tax profit minus tax.
Two key components analysts look at are Exceptionals and Extraordinaries. These are, as the name would suggest, amounts of money that are one-off’s and don’t happen every year for the company.
Exceptionals are defined as being within the company’s normal business activity, like exceptionally high wages because of a large amount of staff overtime.
Extraordinaries are defined as being outside the company’s normal business activity and often outside the company’s control, like a natural disaster or war for example.
They can distort the underlying profit and loss of the company so aren’t included in final figures – they are listed separately. Explanations of these should always be provided by the company so you can see what they are.
The balance sheet will include some (if not all) of following data:
– Non-Current or Fixed Assets: Items such as property and machinery.
– Current Assets: The cash and debts owed to the company (that are due to be paid).
– Current liabilities: these are any debts the company is due to pay, for example to suppliers.
– Non-Current liabilities: These are any long-term loans the company owes.
– Net Assets: This is what you get when you take away all liabilities from all assets.
– Capital Reserves: These are profits built up over the years and held in reserve. Dividends are usually paid out of this pot.
Fundamental analysts use all of the above data to form an opinion on how well a company is doing and to predict how well you think the company will do in both the short and long-term future.
Even though most fundamental analysis is quantitative, in that it can be physically measured – like how much money the company has made that year, how much of that revenue was profit, and how much it owes.
But fundamental analysis can also be qualitative, and based more the character of the company rather than the cold hard facts – like the wider market and consumer sentiment towards the brand name for example.
In modern times, many businesses’ assets are not physical – like building, factories, plant machinery, but intangible – like their brand status and market position (otherwise known as their competitive advantage), their relationship with their customers, and their relationships with suppliers, banks and even governments.
Obviously fundamental investors are looking for healthy financial figures and potential for growth in the future. But they are looking for positive market sentiment too.
Basically, market sentiment is what the majority of traders in the market are thinking or feeling at any one time. As you know, all traders, and people generally, are emotional beings… and you often find that there’s one overriding emotion amongst traders.
That overriding emotion is informed by all the news reports and economic data that are available about a particular stock, or the market as a whole at that time and, depending on whether that emotion is a positive or a negative one, a stock price will go up or down.”
If you want to learn more about fundamental analysis and indeed learn more about technical analysis – including a whole host of simple, proven strategies for trading most markets (not just stocks)…
If you do, you’ll also gain access to my PRO service, where I’ll provide you with regular trade ideas based on my fundamental and technical analysis.
In fact, today I’m telling my PRO readers all about a company I believe make a great trading opportunity – from a fundamental and technical perspective.
If you want to know what that is, then click here to get involved and pick up your FREE book.