Fundamental research

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 doesnt figure into
day trade, though. 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 might start considering long-term outlooks instead of
short-term activity. For example, many people buy Standard & Poors (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 eMini S&P futures or an S&P exchange-traded fund today,
because there can be a lot of zigzagging between right now and the arrival of
the long-run price appreciation.
Fundamental research falls into two main categories: top-down and bottom-
up. As I mentioned earlier, top-down starts with broad economic considera-
tions 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 proba-
bly not for you. Day trading requires quick responses to price changes, not a
careful understanding of accounting methods and business trends. A little fun-
damental analysis can be helpful in day trading, but a lot can slow you down.
Technical analysis
Information about the price, time, and volume of a securitys trading can be
plotted on a chart. The plots form patterns that can be analyzed to show
what happened. How did the supply and demand for a security change, and
why? And what does that mean for future supply and demand? Technical
analysis is based on the premise that securities prices move in trends, and
that those trends repeat themselves over time. Therefore, a trader who can
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