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Stock trading has been around forever but sometimes it can be difficult to construct a bias for whether or not a given company is currently overvalued or undervalued.  One of the ways stock traders tackle this problem is to analyze the most commonly watched stock metrics.  Common examples here include price-to-earnings, return on investment, earnings per share, and compound annual growth rate.  Here we will look at what goes into each of these calculations to determine how they are used when generating new ideas for stock positions.

Price-to-Earnings Ratio (P/E)

 

When we look at some of the common problems that are typically encountered by spread betters (of all experience levels), improper position management often comes in near the top of the list.  In many cases, a trader will conduct the initial market analysis, set a profit target and stop loss, and then move onto the next trade.  This type of approach has become even more popular with the rising popularity of automated trading software.  But it is important to remember that trading is never this simple, and spread betters can limit many potential losses by taking the time to monitor the changing conditions of the market after the initial trade is executed.
 

Managing Negative Positions

 

When spread betters discuss their daily market activity, the majority tends to focus on one of the major asset classes:  stocks, commodities, or forex.  There are some advantages to this approach, as it will allow spread betters to really become an expert in a given area.  It will also become much easier to spot opportunities when they occur because you will have a much better sense of when a certain asset has become overly cheap or expensive.

 

But one thing that gets missed when spread betters focus on one asset class alone is the fact that each of these asset classes are deeply connected.  Having a better sense of the ways these asset classes are connected can make it much easier to identify emerging trends before they happen.

 

Dollar-Denominated Assets

 

There is nothing used by technical traders that is more metaphysical or “astrological” than the Fibonacci sequence. The rationale for why many of these calculations become relevant is truly mind-boggling to many, myself included.

The price wave is measured from roughly 1.4200 to 1.6000. This is about 1800 points of movement, so if the price falls 900 points, to about 1.5100, we will have a 50% Fibonacci retracement. As a general rule, we would expect support to come in at these typical percentage levels.

The last example is the Fibonacci “time zone,” which is plotted with vertical lines. The chart is divided into segments based on the Fibonacci sequence.

Many traders use the Fibonacci levels created by some of these methods as the primary rationale for trading ideas. But it is important to remember that a successful trader will almost never use a single method as an argument for entering a trade.

Indicators are chart calculations that measure the strength of price trends, volatility or momentum. Most traders look at these indicators in conjunction with moving averages and support and resistance levels to determine whether or not high probability trading setups are being formed.

The above example uses the Relative Strength Index (RSI), which is one of the most common indicators used by traders. RSI is a momentum indicator that shows overbought/oversold conditions, plotted in a range from zero to 100.

RSI generally uses 14 periods as its reference point but the MACD lines are based on information gathered from the previous 12 and 26 exponential price intervals. Remember that “exponential” essentially means that recent periods are weighted more heavily.