How to Analyze Stock
There are two basic things to learn in how to analyze stock. There is fundamental analysis and there is technical analysis. For long term investing it is important to understand the workings of a company, its products and its balance sheet. For day trading when the trader will buy stock and sell stock every day it is more important to use technical analysis tools such as Candlestick patterns in order to anticipate short term stock price movements and market reversal. Whereas long term investors are interested in the price to earnings ratio of a stock, traders are more concerned with the use of Candlestick trading tactics and Candlestick pattern formations. In short, how to analyze stock has to do with trading or investing.
To a degree both investor and trader need to know both ways to analyze stock. The trader will be well served by knowing which stocks may be most volatile and thus most profitable to trade. Being able to predict that a stock will rise in the near future will enable the options trader to make money buying calls and buying puts. Although the trader will use Candlestick analysis to analyze price movement the trader will only find the stock and have an idea of its prospects by knowing the company’s fundamentals. Thus the trader will be interested in the stock in part due to fundamental analysis but will execute trades or trade options based upon technical indicators.
Learning how to analyze stock will start with the fundamentals. Then it builds to a thorough knowledge of technical trading. Investors especially need to learn how to identify factors used in value investing. Learning how to identify a margin of safety in a stock can lead to long term gains. Looking for a low price to sales ratio can be helpful in identifying potentially profitable stock picks. When an investor or trader understands how to analyze stock fundamentals it is time to move on to the technical aspects of analysis.
Technical analysis in a more formal form has been around for around three hundred years. It came out of commodity trading for rice in ancient Japan. The fact is that markets run in patterns and the patterns repeat themselves. Certain patterns indicate that the market price of an equity or derivative will go up next and certain patterns indicate that the price will fall. Candlestick basics allow the trader to see a visual representation of market movement. The trader will enter price data into a chart, or have the computer do the work. Then the trader will do Candlestick chart analysis looking for indications of new market trends or price reversals.