There are two broad philosophies in the world of stock market investing. Fundamental analysis is the first one and technical analysis is the second. In this article, we will discuss a low-risk approach that combines technical and fundamental analysis into a strategy that can yield excellent returns. Fundamental analysis is used to find the strongest companies in a particular sector while Technical analysis is used to find the overall trend of the market and the exact time to execute the trade.
Overview of the trading strategy
This type of analysis makes use of broad economic indicators and company financial statements to choose the best company to invest in. The basic framework that can be used to do the analysis is listed below.
- Determine the current market trend.
- Find a list of companies that are aligned to your personal values.
- Analyze each company and find the ones that are strongest such as upstox.
- Use charts to choose the right moment to trade.
- Determine the current market trend
Dow theory is a set of ideas formulated by Charles Dow from 1882 to 1902. To have three parts, primary, secondary and minor is the trend that Dow considered. The primary trend can last for years, secondary trends are corrections in the primary trend and can last from three weeks to three months and minor trends are corrections that last for a few hours to a couple of weeks. The major or primary trend is of interest here. The primary trend according to Dow has three distinct phases:
An accumulation phase: This is the phase where the most astute investors are doing the buying.
Public participation phase: This is where most technical analysts start to buy because prices are going up and business news is good.
Distribution phase: This phase is when economic news is good, newspapers are printing positive stories about the stock market and when public participation in the stock market is on the increase. This is where the informed investors begin to “distribute” before anyone else starts selling.
It is important not to buy during the distribution phase or when the market primary trend is down. The markets have roughly 4 to 5-year cycles when it is strongly going up and then a period of about a year when the primary trend is down and the market prices just drop. Be aware of where the markets are in their cycle and when stock prices are priced too high as it is not prudent to buy during this phase.
Find companies aligned to your values
It is important to pick those companies that you can relate to as an individual. Analyze all the things that interest you and the values that you relate to and then choose a company that aligns with this. If you don’t approve of gambling then it would not make sense to invest in a company that has casinos or sports betting as their primary focus. Yahoo finance has a comprehensive listing of stocks and the sectors that they fall in and this will enable you to find a company that you can relate to.