Don't get distracted by fundamental analysis when you day trade forex, stocks, or futures. Fundamentals are key for long-term investors, but day traders will likely find that their analysis doesn't improve their performance on short-term trades. Here's why.
- Day traders profit from using a trading plan, while long-term investors profit over time from strong business fundamentals.
- Trading plans are based on time and price.
- Business fundamentals aren't timely. It can take months for information to show up in prices.
- Fundamental news events, such as earnings reports, may have large short-term impacts on price.
- A day trader doesn't have to be concerned with the information in the report, but you should track earnings dates to prepare for price ups and downs.
Fundamental Analysis Is Irrelevant on Short Time Frames
What appears on a company's balance sheet isn't going to matter much for a trade that lasts five minutes at most. A company can have awful financial statements, yet it can rally for months on end. It can be strong financially, with great earnings, yet the share price can drop like a rock some days. Fundamentals don't matter on short-term trades.
Anything can happen within the very short time of a day trade. The price is always moving both up and down. Day traders don't have to know about the financials of the company they're trading. Such data will only be a distraction. Don't let it bias your trades if you know about the finances of a company. Anything can happen during one day or one trade.
Profits Don't Rely on Fundamental Analysis
The first goal of a day trader is to consistently make use of a trading plan. Researching how badly or how well a company is doing only blinds you to the only real piece of timely information that matters: the price chart of that company (or forex pair or futures contract).
The price chart tells you what an asset is doing at a given time. It lets you find trade setups based on your trading plan. There's no need for fundamentals if a trading plan has proved profitable. Day traders are better off trading and forming plans that are based on repeating price and chart patterns that occur every day.
Leave the fundamental trades to long-term investors who aren't worried about minor intraday price ups and downs.
Fundamentals Are Not Timely
Your charts tell you what is happening now. That's what matters to a day trader. You don't have to worry about where a stock price will be 10 years from now.
Certain economic indicators are released every few days. Company financials are required to be released each quarter. This is infrequent enough to make them of little use to a day trader.
Day traders practice their chart-reading skills. They find trade setups and use their own trading plans instead of reading statements and reports,
Short-Term Reactions Aren't Always Predictable
It would seem that a stock should go up if analysts are expecting a company to produce $1/share in earnings, and the company instead produces $1.05/share. But that isn't always the case.
How the market will react to a fundamental data point can seem random. Sometimes a good result can send an asset plunging lower if people were expecting an even better result. A bad result can send an asset higher if the bulk of traders thought it would be worse. Many day traders get seduced into thinking they can predict how an asset will move, based on what they think the fundamentals will reveal and/or how the market will react to them.
It's best to just leave fundamentals out of day trading if you can't predict the outcome of the news with good probability and good risk/reward ratio.
The One Time to Monitor Fundamental Data
Day trading doesn't usually require you to closely follow the news or be aware of the financial condition of a company or the economy, but you need to know when earnings and economic reports will be released. The actual numbers related to these releases don't matter to most people, but these news events can cause big swings in price as both short- and long-term traders react to the news.
The Bloomberg economic calendar provides a schedule of news releases and key events that could affect the U.S. market. Stop day trading about five minutes before, and for about three minutes after, the news release, or even longer if the price is moving a great deal. Focus on the normal movements that occur every day. Don't try to predict how the market will react to a high-impact news release.
The price will often move hard in both directions, stopping you out before the market reaches a more sustained trend.
The same concept applies to forex trading. Step aside for high-impact news releases. The forex market is global, so be aware of all significant news events that may impact the currency pairs you're trading.
Be aware of scheduled company announcements in the stocks you're trading, such as those about earnings. Stock traders should also be aware of major economic data releases. They should step aside during those times as well.
Final Word on Day Trading and Fundamentals
Fundamental analysis is a tool used mostly by long-term investors. It's not a timely resource for day traders. There's a long lapse between times when these data points are released. A stock can rise or fall on any given day or at any minute, despite what the fundamental data shows. Fundamental data releases can cause big price moves. But the direction and impact of those moves are hard to predict.
Day traders are better off stepping aside during news releases. Stick to trading the price patterns that occur often throughout the day in a certain market instead.