Unless you are able to develop a considerable trading edge over the other traders, you will finish up losing your income, even if you are disciplined and organized. In this report, I talk over some elements that I use in my trading edge.

Fundamental Analysis

Fundamental analysis is the procedure of evaluating the financial condition of a company using financial incidents, price/earning ratios, revenues, market share, sales and growth, etc. This sort of analysis may be long-drawn-out so rather than going through pages of financial reports, I merely look at IBD ratings.

I love to use Investor’s Business Daily (IBD located at investors.com) to acquired a quick overview of a stock. The IBD rating covers:

1 – Earnings Per Share (EPS) rating: tells me a stock’s average temporary (recent quarters) and long term (last three years) earning growth rate. The number I see is how the company compares to all other companies. The scale runs from 1 to 99, 99 being the best.

2 – Relative Price Strength (RS) Rating: Measures a stock’s relative price change in the past 12 months compared to all other equities. The scale runs from 1 to 99, 99 being the best.

3 – Industry Relative Price Rating: Compares a stock’s industry price action in the last 6 months to the other 196 industries in IBD’s industry list. The scale is from A to E, A being the best.

4 – Sales + Profit Margins + ROE (Return on Equity) Rating: Crunches a firm’s sales growth rate during the last 3 quarters, before and after profit margins and return on equity into one letter. The scale is from A to E, A being the best.

5 – Accumulation/Distribution rating: Applies a formula of price and volume changes in the last 13 weeks to evaluate if it is being accumulated or distributed. A = heavy buying, C = Neutral, E = heavy selling.

If you like the thought of including fundamental analysis into your trading plan, consider trading only stocks that meet some minimum requirements – as an example A or B, > 70, etc.

I love to use fundamental ratings for longer term trades such as the ones I plan on weekly charts. It is not truly helpful if you trade intraday.

Technical Analysis (visit our sister  sites www.technicalindicators.biz, www.patterndaytrading.org and signaltrading.org}

Fundamental analysis is great to build an index of strong stocks, or as a method to filter out weak stocks, but that is about it. It doesn’t provide you with an objective method to enter and exit trades. All my trading decisions (entry, exit, and stops) are founded on technical analysis.

Technical analysis is the research of prices. The amount action draws patterns on charts and because human behavior can be repetitive, the amount patterns can likewise be repetitive.

You can choose from an assortment of chart types. The Japanese candlestick charts are by far the best and it is the only form you need. The’re entire books dedicated to the learning of candlestick patterns – if you are serious about studying candlestick charts, look at books written by Steve Nison and and Gregory L. Morris.

- Support and Resistance: The most significant concept in technical analysis is Support and Resistance. It forms the foundation for every trading decision and could cover pages but I will limit myself to simplified definitions and a couple examples:

Support level: A price level that a declining market or stock failed to go into

Example: the reduced of the last day forms an area of support and is frequently used as a stop loss.

Resistance level: A price level that a rising market or stock failed to break through

Example: a prior excellent for an uptrend forms an area of resistance and can be used as a nominal amount objective to take a few profits.

Some technical indicators may also provide some support and resistance, as an example moving averages, in part maybe because so many traders expect it.

- Oscillators

An oscillator is a technical indicator that tells you at a glance whether a market or a stock currently trades in an "overbought" or "oversold" condition. Some traders use oscillators to forecast a change of direction. Some examples include the RSI, Stochastic Oscillator, and MACD.

There are many oscillators and technical indicators. I personally look at them to filter out some stocks if I have too many good ones to choose from. I never give them a try as a sign to open or close a trade.

- Public Sentiment

I search for support and resistance on the VIX (Volatility Index) daily chart to anticipate reversals.

I look at the Put/Call Ratio (5 MA and 10 MA) on the daily chart to see if traders are too bearish (MAs > 0.8) or too bullish (MAs < 0.5).

(MA = Moving Average) 

- Market internals to see if the market is overbought or oversold

I look at the TRIN (5 MA and 10 MA) on the daily chart – overbought (MAs < 0.8) or oversold (MAs > 1.2).

I look at the McClellan Oscillator – the market is overbought if it rises above +70 and oversold if drops below -70. A buy signal is generated if it falls into the oversold area (-70 to -100) and then shows up – a sell signal is generated if it rises into the overbought area (+70 to +100) and then turns down. If it passes the -100/+100 levels then it could be an indication of continuation of the actual trend.

- Market and Industries

I like to buy stocks from industries in a powerful uptrend and short stocks from industries in a downtrend. I also consider the direction of the industry for the day (positive or negative).

Putting it all together

This article is not about teaching you how to formulate a footing but hopefully it shows you that there are many unusual tools that can be employed to improve your odds. It needs time to find a compounding that fits your personality. It takes time to find what works for you

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