Considering 2020 had so far been a turbulent period to trade shares, picking the right names becomes an even more challenging activity. At the same time, the market has been volatile and in this kind of environment, a lot of short-term and mid-term trading opportunities arise. To improve the process of choosing the right shares to trade, the following three tips will be very helpful. Due to their flexibility, traders can use them in combination with any technical strategy or risk management model, because these tips have the sole purpose of providing an insightful view on stocks.
Look after favorable fundamentals
The theory suggesting market fundamentals are dead might be exaggerated, considering the shares performing well benefit from solid and profitable underlying businesses. Companies like Apple, Amazon, Microsoft, and Google are just some of the names that reported above-expectations figures for both revenue and EPS, which means there is no surprise they continue to be the most valuable companies in the world.
ValueWalk's Raul Panganiban interviews Joseph Cioffi, Author of Credit Chronometer and Partner at Davis + Gilbert where he is Chair of the Insolvency, Creditor’s Rights & Financial Products Practice Group. In the interview, we discuss the findings of the 3rd Annual report. Q2 2021 hedge fund letters, conferences and more The following is a computer Read More
At the same time, they invest in R&D, innovating their industries, and thus creating favorable conditions for increased profitability and productivity in the future. As a result, picking up shares should be a process that does not skip looking at fundamentals such as EPS, revenue, gross margin, net margin, net profit, dividends, and others.
Monetary policy = the only game in town?
Increased central banks’ intervention had been one of the key driving forces behind stock market activity since the 2008 financial crisis. Statistics show that stocks go up when central banks print money and move lower in the opposite scenario. Monitoring the activity of these institutions becomes part of the trading process and traders need to stay updated with the latest decisions.
They need to understand that all the new money being created stays in the financial industry and benefits publicly listed companies via cheap share buybacks and corporate bonds funding. To learn how to trade shares, understanding the monetary policy implications had become one of the key components, despite the frustrations generated by the decoupling between stock markets and the actual economy.
Price directional bias
Stock trading becomes more efficient when the technical analysis is part of the decision-making process. Even though investors like Warren Buffett believe looking at price is not investing, the price developments can show a lot of information about what happens with the underlying order flow. Traders can find key support/resistance areas, use candlestick patterns, spot impulsive moves or corrections, and gain a deeper understanding of any given assets.
Trading is efficient when the price has a directional bias. It is possible to trade ranging or consolidating markets, but impulsive price action is the ideal environment to trade.
These three tips won’t make up for the entire process of picking the right shares but can increase the ability to make the right choices. By following them, traders will take into account fundamentals, monetary policy implications, and price action developments, gaining a deeper understanding and increasing the probability of choosing the right names.