There are three major trading philosophies: technical trading, fundamental trading and what many traders call cosmic trading. Technical traders analyze market price charts and technical indicators such as moving averages, oscillators, relative strength index, stochastics and advance-decline ratios, among others. Fundamental traders follow economic indicators, corporate earnings, company news and geopolitical events to determine how to trade their positions. Cosmic traders simply buy at the best price available and sell at the best price available without attempting to time the market.
Cosmics vs. Fundamentalists
If you are attempting to trade without using any technical indicators or oscillators, you can follow the method used by many trading desk traders, which is to avoid buying anything when the market is going down and avoid selling when the market is going up. These traders are sometimes called cosmic traders because their strategy involves not watching any indicators or company news - just price movements - and their goal is to sell higher than where they bought. Turnaround is quick. The approach is considered very conservative, because they are holding most positions for just a few minutes and taking very small profits and losses. Fundamentalists, on the other hand, tend to trade for the long term by identifying trends in individual stocks or broad markets. Although it seems as though fundamental traders are trading conservatively because their decisions are made based on fundamental research, they actually accept high market risk because they hold their positions for months or years. They believe good company news combined with supportive economic and political conditions will result in rising prices on their investment positions.
Use economic indicators to trend trade or determine business cycle position for optimal corporate earnings. Different indicators become important at different times in the business cycle. During recessions, unemployment, auto sales, capacity utilization, housing starts, gross domestic product, and consumer sentiment are important. During boom times, the producer and consumer price indexes, consumer credit and the purchasing managers' index are important predictors of inflation and slowing business. It is useful to study how economic indicators reflect the direction of the economy and how Federal Reserve monetary policy controls recessionary and expansionary economic times.
Some industries perform better than others during recessions and expansions. Analyze company financials, announcements and quarterly and annual reports for news of that company's strategic plans and management skills. Apply industry analysis and economic analysis to determine the likelihood of good or bad earnings reports. Estimate earnings by using past history in tandem with your industry evaluation and estimate price targets based on the company's historic price-earnings ratios.
Never forget basic market fundamentals such as summer and holiday slow periods, options expiration, regulatory changes, margin changes and other market-specific conditions. A power outage at the NYSE or the confluence of computerized trading moves can drastically alter both technical and fundamental outlooks as can an overabundance or under-supply of IPOs or a reformulation of one of the major stock indexes.
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