Introduction to Transaction Types: Fundamental Traders

Fundamental trading is a way for traders to focus on company-specific events to determine which stocks to buy and when. Fundamental-based trading is more closely related to a buy-and-hold strategy, rather than short-term trading. However, under certain circumstances, fundamental trading can generate considerable profits in a short period of time.

Different types of traders

Before we focus on fundamental trading, let’s review the main types of stock trading:

  • Scalping: Scalpers are individuals who conduct dozens or hundreds of transactions every day, trying to “scalp” each transaction by using the bid-ask spread.
  • Momentum trading: Momentum traders look for a large number of stocks that fluctuate sharply in one direction. These traders try to use the momentum to achieve expected profits.
  • Technical transactions: Technical traders focus on charts. They analyze the lines on a stock or index chart, looking for signs of convergence or divergence that may indicate buying or selling signals.
  • Basic transaction: Fundamentalists trade companies based on fundamental analysis, which examines company events, especially actual or expected earnings reports, stock splits, restructurings, or acquisitions.
  • Swing trading: Swing traders are basic traders who hold positions for more than a day. Most fundamentalists are indeed swing trading, because changes in company fundamentals usually take days or even weeks to produce price changes that are sufficient for traders to make reasonable profits.

Novice traders may try each of these techniques, but they should ultimately choose a niche market that matches their investment knowledge and experience with their motivation to invest in further research, education, and practice.

Basic data and transactions

Most stock investors know the most commonly used financial data in fundamental analysis, including earnings per share (EPS), income, and cash flow.These quantitative factors include any number in the company’s earnings report, cash flow statement, or balance sheet. They can also include the results of financial ratios, such as return on equity (ROE) and debt to equity (D/E). Fundamental traders may use this type of quantitative data to identify trading opportunities, for example, if a company’s earnings results surprise the market.

For traders and investors everywhere, the two most concerned fundamental factors are earnings announcements and analyst upgrades and downgrades. However, it is difficult to gain an advantage on this information, because Wall Street does have millions of eyes looking for the same advantage.

Earnings announcement

The most important part of the earnings announcement is the pre-announcement stage-the time when the company issues a statement stating whether it will meet, exceed, or fail to meet earnings expectations. Trading usually occurs immediately after such announcements are made because there may be short-term momentum opportunities.

Analyst promotion and demotion

Similarly, analyst upgrades and downgrades may bring short-term trading opportunities, especially when well-known analysts unexpectedly downgrade stocks.The price movement in this case may resemble a stone falling off a cliff, so traders must be quick and flexible to short-sell.

Earnings announcements and analyst ratings are also closely related to momentum trading. Momentum traders look for unexpected events that cause stocks to trade a large number of stocks and steadily rise or fall.

Fundamental traders are usually more concerned with obtaining information about speculative events that others in the market may lack. To stay one step ahead in the market, savvy traders can often use their knowledge of historical trading patterns that occurred during the emergence of stock splits, acquisitions, acquisitions, and reorganizations.

Stock split

When the $20 stock is split in a 2-to-1 ratio, the company’s market value will not change, but the company now has twice the number of outstanding shares at a stock price of $10. Many investors believe that because investors are more inclined to buy $10 stocks than $20 stocks, stock splits indicate an increase in the company’s market value. However, please remember that this will not fundamentally change the value of the company.

To successfully carry out a stock split transaction, a trader must first correctly identify the current trading stage of the stock. History has proven that before and after the split announcement, there will be many specific trading patterns.The price rises, therefore, short-term buying opportunities will generally appear in the pre-announcement stage and the rising stage before the split, while price depreciation (short-selling opportunities) will appear in the post-announcement depression and post-split depression. By correctly identifying these four stages , Split traders can actually enter and exit the same stock at least four times at different times before and after the split, and there may be more intraday or even hourly transactions.

Acquisitions, acquisitions, etc.

The old adage “Buy rumors and sell news” applies to acquisitions, acquisitions, and restructuring transactions. In these cases, stocks usually experience extreme price increases during the speculative phase before the event, and then fall sharply immediately after the event is announced.

In other words, for savvy traders, the old investor’s motto “sell the news” requires great qualifications. The trader’s game is one step ahead of the market. Therefore, traders are unlikely to buy stocks during the speculative phase and hold them until the actual announcement. Traders are concerned about capturing some momentum during the speculative phase and may enter and exit the same stock multiple times when the rumor spreader starts to work. A trader may hold a long position in the morning and a short position in the afternoon, keeping an eye on the chart and level 2 data to understand when to change the position.

When the actual announcement is made, traders are likely to have the opportunity to short the acquisition of the company’s stock immediately after the acquiring company’s announcement of the acquisition intention, thus ending the speculative frenzy before the announcement. Few people have seen positive acquisition announcements, so short-selling companies that are currently being acquired is a dually reasonable strategy.

In contrast, if the market did not anticipate the company’s restructuring, and the stock has fallen for a long time due to internal company problems, then the company’s restructuring is likely to be favored. For example, if the board of directors suddenly removes an unpopular CEO, the stock may experience a short-term rise to celebrate the news.

Trading the stock of an acquisition target is a special case because the tender offer will have an associated price per share. Traders should be careful not to get into trouble when holding stocks at or near the issue price, because once they find a narrow range close to their target, stocks usually do not fluctuate significantly in the short term. Especially in the case of a rumored acquisition, the best deal opportunity will appear in the speculative phase (or a period when the rumored per-share price of the acquisition offer will drive actual price changes).

Rumors and speculation are risky trading propositions, especially in the context of acquisitions, acquisitions, and reorganizations. These events caused extreme stock price volatility. However, due to the potential for rapid price changes, these events may also become the most profitable basic trading opportunities.

Bottom line

Many trading strategists use complex models to find trading opportunities related to events before and after earnings announcements, analyst upgrades and downgrades, stock splits, acquisitions, acquisitions, and restructurings. These charts are similar to those used in technical analysis, but lack mathematical complexity.These charts are simple model charts. They show historical patterns of trading behavior that occurred near these events, and these patterns are used as a guide to predict current short-term trends.

If fundamental traders correctly identify the current position of the stock and the subsequent price changes that may occur, they have a great chance of executing a successful trade. In the case of excitement and hype, fundamental trading may be risky, but savvy traders can reduce risk by using historical patterns to guide their short-term trading. In short, investors should do their homework before entering.


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