One of the great things about trading is that there are so many different styles, tactics, strategies, and approaches. It’s a perfect example of something for everyone. The point is, that whatever your preferred timeframe, risk tolerance, or profit goals, it’s possible to choose from many diverse ways of operating. Of course, there are a few points common to all the styles, like knowing how to understand chart patterns, how to read a daily price action line, and how to conduct relevant research on a company. You don’t need to become an expert on all the methods, but it’s useful to be aware of their key aspects. The smartest thing for new traders is to learn the basics of each general approach and then decide what works best for their particular goals and preferences. If you’re brand new to the stocks, crypto, forex, or other securities markets, here’s a look at each of the styles, the time-frames they work best for, and what they main advantages are.
Since there have been markets and prices, people have done fundamental analysis. As its name implies, it examines the fundamental components of an organization’s makeup, like the experience level of its directors, earnings per share, recent product announcements, pending lawsuits, industry reputation, and more. In the same way that a physician would view a patient’s overall health, these analysts look at corporations as living, breathing entities.
For investors who have long-term profit goals, are aiming to beef up retirement portfolios, or just prefer to look at the big picture, FA is the way to go. It emphasizes the core components of a company’s financial health without regard to the short-term share price. Many FA enthusiasts choose blue chip stocks and older, established corporations as their favorite investing targets. The advantages include its reliance on real, inherent characteristics of a business and its lack of sticky, often complex mathematics. If you have a lot of patience and enjoy digging deep when researching your investment candidates, this is probably a good choice for you.
Technical analysis is the polar opposite of the fundamental approach. It focuses on short-term trends in share price, volume, and a few other numerical parameters. These folks are often called chart traders because they don’t worry so much about a company’s management style, products, or core features. Instead, they’re numbers people who apply various mathematical formulas to price trends, changes in volume, and daily opening and closing price levels.
The advantage of TA is that it’s rather objective, being based on measurable components that are relatively easy to interpret. For instance, a technical enthusiast might hone in on a corporation’s 100-day moving average of share price and compare it to the 10-day moving average in order to identify a trend. This way of choosing investment candidates is straightforward and allows for minute parsing of numerical data at any given time. If you like dealing with objective measures of value and prefer a short-term or medium-term time frame, this route could be your best bet.
Price Action Trading
Not as well-known as TA and FA, price action trading has gained ground in the past decade as more and more people are choosing to day trade as a side job or as a full-time endeavor. What is it? In short, these pros use a magnifying glass to study pricing charts. In a way, they’re similar to technical analysts but dig even deeper on minute by minute patterns. It’s safe to say that this is a microscopic, up-close version of TA, but with a twist.
Anyone who wants to make very fast transactions, getting in and out of the market in perhaps a minute or two, will follow price action. In fact, this second by second pattern of activity without regard to what happened yesterday, last week, or last month. Additionally, there’s little regard for anything but price, even though same PA folks pay attention to volume and longer-term moving averages. Day traders use this system to determine entry and exit points on most of their transactions.
In the real world, most people involved in the securities markets use combinations of the three main strategies. The most common hybrid technique is to use PA alongside TA. Moving averages are extremely popular tools from TA that end up in everyone’s tool boxes. Even fundamental analysts often add a long-term moving average to their decision-making arsenal in an attempt to stay out unless the trend is headed up. Likewise, price action enthusiasts also keep their eyes on long, medium, and short trend lines. So, it’s safe to say that there’s a lot of crossover among the three main styles.