Whether you day trade forex, stocks or futures, don't get distracted by fundamental analysis. While fundamentals are relevant to long-term investors, day traders will likely find that fundamental analysis does not improve their performance on short-term trades. Most successful day trades don't concern themselves with fundamentals. Here's why.
- As opposed to long-term investors, who profit over time from strong business fundamentals, day traders profit from executing a trading strategy.
- Trading strategies are based on time and price.
- Business fundamentals are not timely; it may take months for fundamental information to be reflected in the price.
- Fundamental news events, such as earnings reports, may have significant short-term impacts on price, and while a day trader doesn't need to be concerned with the information in the report, they should track earnings dates to prepare for price volatility.
Fundamental Analysis Is Irrelevant on Short Time Frames
For a trade that last five minutes, what is on a company's balance sheet isn't going to matter much. A company can have horrible financial statements, and yet for months on end, it can rally. A company can be strong financially, with great earnings, and yet some days the share price will drop like a rock. The point is, fundamentals don't matter on short-term trades.
Anything can happen within the very short time duration of a day trade because the price is always moving, both up and down. As day traders we don't need to know anything about the financials of the company we are trading. Such data will only serve to distract us. If you do know about the financial position of a company, don't let it bias your trades. As indicated, anything can happen during one day, and especially during one trade.
Day Trading Profits Don't Rely on Fundamental Analysis
As a day trader, the primary goal is to consistently implement a trading plan. Researching how badly or well a company is doing only blinds us to what is happening on 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 us exactly what an asset is doing at any given time. By analyzing the price chart we can find trade setups based on our trading plan. If a trading plan or strategy has been proven profitable, then there is no need for fundamentals. Day traders are better off trading and formulating strategies based on repeating price (chart) patterns that occur every day and leaving the fundamental trades to long-term investors (who aren't worried about minor intraday price fluctuations).
Fundamentals Are Not Timely Like Charts
As indicated above, your charts tell you exactly what is happening now. That's what matters to a day trader. We don't need to worry about where a stock price will be 10 years from now (like an investor does), we only need to worry about right now. Various economic indicators are released every few days, and company financials are released each quarter. The infrequent occurrence of these data points makes them of little consistent use to a day trader.
Instead of reading financial statements and economic reports, day traders practice their chart reading skills, finding trade setups and implementing their trading plan.
Short-Term Reactions to Fundamental Data Are Not Always Predictable
It would seem reasonable that if analysts are expecting a company to generate $1/share in earnings, and instead the company produces $1.05/share, that the stock would go up. Yet, that isn't always the case. How the market will react to a fundamental data point (whether economic or company/commodity-specific) can be seemingly random. Sometimes a good result can send an asset plummeting lower (if people were expecting an even better result) or 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 it. Many day traders have gone broke attempting that. If we can't predict the outcome of the news with a good probability (and good risk/reward ratio) then it best to just leave fundamentals out of our day trading.
The One Time to Monitor Fundamental Data
As a day trader, there is no need to follow the news or be aware of the underlying financials of a company or the economy. We do need to know when earnings or economic reports are released though. While the actual numbers related to these releases don't matter to most day traders, these news events can cause big swings in price as both short and long-term traders to react to the news.
If day trading U.S. markets, the Bloomberg economic calendar provides a schedule of news releases and important events that could affect the market. Stop day trading about 5 minutes before, and for about 3 minutes after (sometimes longer if the price is moving wildly), the news release. Focus on capturing normal movements that occur every day; don't get greedy and try to predict how the market will react to a high impact news release. Often the price will move aggressively in both directions, stopping you out before the market establishes a more sustained trend.
The same concept applies to forex trading. Step aside for high impact news releases. Since the forex market is global, be aware of all high impact news events that may impact the currency pairs you are trading.
If day trading stocks, be aware of scheduled company announcements in the stocks you are trading, such as earnings announcements. Stock traders should also be aware of major economic data releases, and step aside during those times as well.
Final Word on Day Trading and Fundamentals
Fundamental analysis is a tool primarily used by long-term investors. It is not a timely resource for day traders since there is a long lapse between when these data points are released. Also, on any given day or minute a stock can rise or fall despite what the fundamental data indicates. While fundamental data releases can cause big price moves, the direction and magnitude of those moves are hard to predict with any certainty. Therefore, day traders are better off stepping aside during news releases and not attempting to perform fundamental analysis. Instead, stick to trading the price patterns that occur frequently throughout the day in a particular market.
Day trading is considered to be financially risky. Visit FINRA's website to learn more about these potential risks.
The Balance does not provide tax, investment, or financial services or advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.