5 Types of Traders in Fundamental Trading

5 Types of Traders in Fundamental Trading

Fundamental trading is the process by which a trader concentrates on company-specific events to identify which stocks to buy and when to acquire them. Trading on fundamentals is more closely related to a buy-and-hold approach than to short-term trading. However, there are unique circumstances where trading fundamentals can create significant returns in a short period of time.

5 Types of Traders in Fundamental Trading

Trader Type

Before we get into fundamental trading, let's review the 5 types of equity trading:

Scalping: A scalper is someone who makes dozens or hundreds of transactions every day in an attempt to "minimize" a small profit from each trade by taking advantage of the bid-ask spread.
Technical Trading : Technical Trading only focuses on charts and graphs. They look for evidence of convergence or divergence on a stock or index chart that might indicate a buy or sell signal.
Momentum Trading: Momentum traders target equities that move strongly in one direction in large volume. These traders are trying to up the trend to the targeted profit.
Trading Fundamentals: Fundamentalists only trade companies based on fundamental analysis, which analyzes company events such as real or predicted earnings reports, stock splits, reorganizations, or acquisitions.
Swing Trading: Swing traders are fundamental traders who hold positions for more than one day. Most fundamentalists actually do swing trading because changes in a company's fundamentals generally take days or even weeks to create a price movement large enough for the trader to make a profit.

Novice traders should try with all these strategies at first, but they should eventually choose a niche that suits their skills and investment experience in a style in which they are forced to dedicate more study, education and practice.

Trading Data and Fundamentals

Most equity investors are familiar with the financial data most commonly used in fundamental analysis, such as earnings per share (EPS), earnings, and cash flow. Any data that appears on a company's income statement, cash flow statement, or balance sheet is an example of a quantitative element. They may also contain the results of financial measures such as return on equity (ROE) and debt to equity (D/E). Fundamental traders can use this quantitative data to find trader opportunities if, for example, a company releases earnings results that surprise the market.

Earnings releases and analyst upgrades and downgrades are two of the most closely monitored fundamental variables for traders and investors around the world. Profiting from such information is difficult, because there are millions of eyeballs hunting for the same profit.

Income Announcement

The pre-announcement phase — when the company issues a statement stating whether it will meet, exceed, or fail to meet revenue expectations is the most important component of an earnings announcement. Traders are often executed immediately after such an announcement because scalping opportunities are expected to become available.
Similarly, increasing and decreasing analyst ratings can provide scalping trading opportunities, especially when a well-known analyst suddenly downgrades a company. In these circumstances, the price movement can be compared to a rock falling from the abyss, therefore traders must be quick and agile with their short selling.

Analyst Rating Upgrades and Downgrades

Earnings reports and analyst ratings are closely related to trading momentum. Momentum trading looks for unexpected events that prompt stocks to trade in large volumes and move consistently up or down.

Trading fundamentals are often more concerned with gathering knowledge about speculative events that may be missing from the rest of the market. Astute traders can often use their knowledge of previous trading patterns that occurred during initial stock splits, acquisitions, takeovers, and reorganizations to stay one step ahead of the market.

Stock Split

When the $20 stock was split 2-for-1, the company's market capitalization remained the same, but the company now has twice as many shares outstanding at a stock price of $10. Many investors assume that because investors are more likely to buy 10 shares than 20, the stock split will result in an increase in the company's market capitalization. However, keep in mind that this has no effect on the value of the company.

To trade stock splits effectively, a trader must first accurately identify the phase in which the stock is currently trading. Various different trading patterns have been seen before and after separate announcements in the past. Price appreciation, and therefore scalping opportunities, will often occur during the pre-announcement and pre-split run-up, while price depreciation (shorting chances) will occur during the post-announcement depression and post-split depression. By accurately detecting these four phases, a split trader can trade in and out of the same stock at least four times before and after the split, with perhaps more trades intraday or even hourly.

Acquisitions, Takeovers and More News

The classic "buy rumours, sell news" adage applies to individuals who trade in acquisitions, takeovers, and reorganizations. In these cases, the stock may often experience dramatic price spikes before the event and heavy losses soon after the event is reported.

However, for the savvy trader, the goal of a trader is to stay one step ahead of the market. As a result, traders are unlikely to acquire shares during speculative periods and hold them until the actual announcement. Traders are interested in gathering some speculative moments and can trade in and out of the same stock many times as the rumor maker gets to work. Traders can hold long positions in the morning and short ones in the afternoon, keeping an eye on charts and data for indications of when to shift positions.

When the actual announcement is made, the trader will most likely be able to short the acquiring company's stock right after announcing his intention to buy, thereby ending the speculative euphoria before the announcement. Positive reactions to acquisition announcements are rare, so short-circuiting the company making the acquisition is a good strategy.

A company reorganization, on the other hand, is more likely to look favorably if it is not anticipated by the market and if the stock has suffered a long-term decline due to internal business problems. If a board of directors suddenly fires an unpopular CEO, for example, the stock could soar in the near future in response to the news.

A trader should be careful not to be caught holding a stock at or around the bid price, as stocks usually don't move far in the short term once they find their tight range on the target. The strongest possible trades will be in the speculative phase, especially in the case of an alleged takeover (or a period when the reported price per share for the takeover bid will drive the actual price movement).

Rumors and conjectures are dangerous trading opportunities, especially in the case of acquisitions, takeovers and reorganizations. This event causes severe stock price volatility. However, due to the possibility of rapid price fluctuations, these events can also serve as the most profitable fundamental trading opportunity available.

Conclusion

Many trading strategists use complex algorithms to identify trading opportunities associated with events such as earnings announcements, analyst upgrades and downgrades, stock splits, acquisitions, takeovers, and reorganizations. These graphs appear to be similar to those used in technical analysis, but they lack the mathematical complexity. The chart is a simple pattern chart. They show patterns of past trading behavior that occurred near these events, and these patterns are used as recommendations for predicting current short-term fluctuations.

Trading fundamentals have a strong probability of completing a profitable trade if they accurately identify the existing stock position and the expected future price changes. Trading fundamentals may be dangerous during times of euphoria and frenzy, but smart traders can reduce risk by using past patterns to guide their short-term trading. In short, before investing, investors should do their homework before plunging into this world.