When starting to invest in the stock market, you will quickly realize that you must choose the right asset to invest in at the right time to be profitable over the long run – and that is far from easy! How do you pick the right asset? What should you consider? What technique is best? Here are a few methods and tools you can use to make better trading decisions when it comes to which stocks you should invest in.
Based on historical price data and technical indicators, technical analysis helps traders anticipate future price movements. By analyzing the past performance of stock prices and looking for chart patterns, traders using technical analysis can understand demand and supply psychology and how the market participants will likely react to certain levels of prices.
Candlesticks patterns, support and resistance levels, channel, trend-lines, and technical indicators like the MACD, the RSI, the Ichimoku cloud, and the volume are among the most popular technical tools, which help technical traders determine which stocks to invest in and when.
While technical analysis is all about charts and analyzing the price action, the fundamental analysis analyses the fundamental factors of a company (financial metrics and ratios) to determine the intrinsic value of a stock. By comparing it to the current market value, traders can determine if a stock is undervalued (buying opportunity) or overvalued (selling opportunity). Discounted cash flow analysis and asset-based valuation are the two most used methods to determine the intrinsic value of an asset.
Sales, earnings per share, net revenues, cash flow, debt ratio, investments, net margin, ROE ratio, and dividend payments are among the most important financial figures to analyze. You also need to take into account the growth prospects of the analyzed company (as well as compared to its sector), and the company’s competitive advantages.
Quantitative analysis through stock screeners
Used as a screening tool, stock scanners are of great help for traders wanting to scan the markets quickly to find the best stocks that meet pre-determined criteria and metrics. Learning how to use stock scanners isn’t that complicated, but you first need to determine your trading strategy and style to know which criterion to look for and apply the right filters.
Indeed, stock screeners are a great way to analyze the stock markets for finding trading opportunities, if you have the right filters to apply and you know which kind of companies, you’re looking for to invest in (penny stocks, blue chips, stocks belonging to a particular industry, companies listed in the United States, etc.).
Whether you want to use tools that will automatically help you focus on tangible variables to find stocks that meet your criteria, or you prefer to use technical or fundamental analysis to trade and invest in the stock markets, you should first determine the kind of trader you are, what your financial goals are, how available you are, and what your investment horizon is.
Some traders also use all these techniques combined to increase the chances of picking the right stock at the right moment. Others use these techniques with different investment horizons like technical analysis for short-term trading and fundamental and quantitative analysis for longer-term stock investment. Again – it all comes down to your strategy and goals!