Share Trading Fundamentals

Trading strategy


When trading the stock market, it's important to first create and then follow a trading strategy. You can start with what's known as quantitative data. This is information that shows a company's financial health, and you'll find it in documents like Quarterly Earnings Reports during the earnings season.

Monitor key figures


You should monitor key figures such as the price-to-earnings ratio, the price-to-earnings-growth ratio, the price-to-book ratio, and earnings per share. If the share price is undervalued, you would ideally look to buy, whereas if it's overvalued, you would look to sell.

Quantitative vs. qualitative data


For a solid stock trading strategy, you should also use quantitative data alongside qualitative findings. Key things to consider here can include industry trends, a company's uniqueness in the market, and even its management team. 

For example, if a company like Arm Holdings produces semiconductors and chip architecture, what distinguishes it from its competitors? If something unexpected happens in the market, such as a pandemic, could the company ride it out, or are they likely to fail?

Technical analysis


Another useful way to help strengthen your trading strategy is with technical analysis. Technical analysis uses historical price patterns to help forecast where a stock might trade in the future. For example, if you looked at the historical data and noticed the price of Apple shares had not gone below $100 in the past year, you might decide that if it did reach that level again and you still had a bullish view of the company, this might be a favourable time to invest in the stock.

Using a combination of different indicators, such as Moving Averages, the Relative Strength Index (RSI), Stochastic Oscillators and others, you can build a technical case for why prices are undervalued or overvalued.

Technical analysis

Technical analysis is a broad term we use when we’re examining market data to try and predict future price trends. Technical indicators are an important part of any trader's strategy. 

An example of a share trade 

Tesla is due to announce earnings in a few days, and based on your analysis, you anticipate that the numbers will exceed expectations and thus boost the share price.

With this in mind, you are considering buying Tesla shares ahead of the earnings. Your account balance is $500 USD, and your broker allows you a maximum leverage of 20:1.

Tesla is currently trading at $175 per share. You set your take-profit order at $205 and your stop-loss order at $160. You are therefore risking $15 per share for a potential gain of $30 - a 1:2 risk-reward ratio.

To capitalise on potentially better-than-expected earnings, you enter a 10 Lot Tesla trade at the current price of $175. 1 Lot being equal to 1 share, this represents a notional value of $1,750. The effective leverage used on this specific trade is only 3.5.

If your trade hits the take-profit target, it could potentially make a profit of $300 (10 shares * $30/per share). On the other hand, if your trade falls to the stop-loss level, you could lose $150 (10 shares * $15/share).