How to Use Fundamental Research in Day Trading - dummies

How to Use Fundamental Research in Day Trading

Day traders do very little fundamental research. Sure, they know that demand for ethanol affects corn prices, but they really want to know what the price will do right now relative to where the price was a few minutes ago. How a proposed farm bill might affect ethanol prices in six years doesn’t figure into day trade.

Knowing a little bit about the fundamentals — those basic facts that affect the supply and demand for a security in all markets — can help the day trader respond better to news events. It can also give you a better feel for when swing trading (holding a position for several days) will generate a better profit than closing out every night. But knowing a lot can drag a day trader down.

Fundamental analysis can actually hurt you in day trading, because you may start making decisions for the wrong reasons. If you know too much about the fundamentals, you may start considering long-term outlooks instead of short-term activity.

For example, many people buy Standard & Poor’s (S&P) 500 Index mutual funds for their retirement accounts because they believe that in the long run, the market will go up. That does not mean that people should trade E-mini S&P futures or an S&P exchange-traded fund today, because a lot of zigzagging can happen between now and the arrival of the long-run price appreciation.

Fundamental research falls into two main categories: top-down and bottom-up. Top-down starts with broad economic considerations and then looks at how those will affect a specific security. Bottom-up looks at specific securities and then determines whether those are good buys or sells right now.

If you love the very idea of fundamental research, then day trading is probably not for you. Day trading requires quick responses to price changes, not a careful understanding of accounting methods and business trends. A little fundamental analysis can be helpful in day trading, but a lot can slow you down.