This past weekend, in Omaha, the super bowl of investing happened. Thousands of investors made their annual pilgrimage to the Berkshire Hathaway annual general meeting. They went to learn from one of the best investors of our time.
Warren Buffet started investing in stocks in the 50s. His approach was simple; find good companies and invest in them for the long term. Since then, he has bought and owned companies like Coca-Cola and GEICO insurance. Today, he is the third richest man with a net worth of more than $80 billion. Without a doubt, he is the best investor of our time.
On the other hand, James Simmons is a trader. He started his hedge fund, Renaissance Technologies in the eighties and started applying mathematical models to finance. Today, he has a net worth of more than $20 billion and has achieved better results than any other trader in history.
James Simmons and Warren Buffet have all made a fortune by applying different strategies to the financial markets. While Warren believes in fundamental analysis to buying and owning stocks, James believes in the power of technical analysis to buying and selling of financial assets. He does not believe in owning stocks for years.
Here are the top things you need to look at when considering stocks trading.
First, in stocks trading, the valuation of a company does not matter. One of the major things that stocks investors spend their time doing is finding whether a company is undervalued or overvalued. Essentially, they want to buy a company that is undervalued and one that has significant chances of growth. To do this, they go through a company’s financial reports, listen to its earnings calls, and use various models to analyze the companies. Traders are never focused on all these. Instead, they are focused on finding the right price to either buy or short a company. Their right price is based on the technical indicators and the price action.
Second, in stocks trading, it is recommended to buy and exit within a short period of time. This can be between a few hours and a few days. If you hold a position for more than a week, you are not a trader, but an investor. As such, you should have focused on the underlying performance of the business.
Third, news is very important. In this, you should realize that companies’ stocks move up and down mostly because of the news that comes out. For example, if there is a news story about the departure of a CEO of a company, you should expect the stock to react to that. Another example is when there is a news that a company is about to be acquired. Another common factor is when a company announces financial results. If the quarterly numbers are good, and if the company announces better than expected projections, the stock price is likely to pop.
Fourth, technical analysis should form the foundation of your stocks trading strategy. This is where you take time to come up with a trading strategy based on the signals from the technical indicators. In this, you should aim to identify a trend using trend indicators, and then confirm it using oscillators. Then, you should place a trade with exit points at key Fibonacci retracement levels.