Fundamental analysis is often hailed as the magic pill that solves the complexity of the free market. In reality, fundamental analysis is just one of many ways to look at value and potential return before investing in stocks, among other securities.
Fundamental analysis is not needed for intraday trading as it can hinder the trader and rarely leads to profit on as small a timeline as even a month, let alone a single trading day. You are better off using technical analysis and AI-supported timing strategies during intraday trading.
In this article, you’ll find out more about intraday trading and value in the short-term, but the piece first explores the difference between day trading and intraday trading. You also learn more about fundamental analysis and why the approach is unfit for intraday trading. Finally, you discover the methods used by short-term traders to make money.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Is the Difference Between Day Trading and Intraday Trading?
When you think about active trading, the term “day trading” comes to mind—seeing the word “intraday trading” thrown around might confuse many people. Intraday trading isn’t mutually exclusive to day trading.
Day trading refers to active trading where a trader treats buying and selling stocks and securities as a day job. Even if a trader isn’t actively trading from nine to five, he is a day trader if he makes multiple transactions in a span of a few days.
Intraday trading is a niche within-day trading where a person executes multiple trades within the same day. Provided the account allows, they may even buy and sell the same stock within a day. For this, margin accounts are used as cash settlements take longer. Intraday traders are, therefore, continually working with margin accounts.
What Is Fundamental Analysis?
Fundamental analysis is undertaken when one seeks to invest long-term. To do so, one looks at the business fundamentals of the company listed on the exchange. If the company seems “overvalued” based on its fundamental value, the investor will stay away from it even if it rises in valuation. A day-trader wouldn’t be as dismissive of such a stock.
Fundamental analysis involves looking at the business’s performance, its balance sheet, history of dividends, and current debt to equity ratio, among other things. There are multiple ways to conduct fundamental analysis, and investors like Warren Buffet, who rely on this approach, have fine-tuned analysis strategies that help them see the value before it gets “unlocked.”
The idea is to be the first to find value where others haven’t noticed so you can buy low and hold. The rationale of holding instead of selling is that if one has bought low enough, the undervalued business will eventually grow. Its lowest stock price will still be much higher than the initial buying price.
For example, Buffett’s fund bought $1 billion worth of Coca-Cola stock in 1988 when it traded between $35 and $45.25. Now it trades over $50 most days, and even during the lowest point of the 2020 stock market dip, it traded above $38, which is $3 over the lowest price back when Buffett invested his money in Coca-Cola. However, you can see that 1988 to 2020s is a long time.
By a day trader’s standards, a 42% return might be great, but not across thirty-three years. A 1.1% increase in value is worse than S&P500 and even some foreign savings accounts. Intraday traders, therefore, use other strategies to make money quicker.
What Strategies Do Intraday Traders Use?
As mentioned earlier, intraday traders are day traders with a higher transaction rate and a shorter profit timeline. They take higher risks with lower amounts and aggregate their profits. While a day trader aims to make a profit on certain days and hopes the week brings him a net profit, an intraday trader tries his best not to take a net loss on any single day. To pull this off, intraday traders use the following strategies.
Anticipating the Market
Long-term investors often rebuke the stock market’s short-term ups and downs as irrational. They say the market is reactionary and doesn’t pay attention to the true value. Intraday traders agree and then use this to their advantage.
By keeping a close eye on the financial news and legislation updates, intraday traders can anticipate where the market will move. Therefore, they can lead the market and get the benefit of the value-boost.
A fundamental investor would suggest that Tesla’s rise in valuation isn’t indicative of its business value. To an intraday trader, it doesn’t matter that this is happening because of hype. As long as he buys before the hype reaches its peak and can sell before the enthusiasm dies, he will make a profit.
Following the Leaders
Hedge funds and other financial service providers have gained notoriety for “leading the market”. It is often suggested that they regularly pump and dump stocks to make money off people who join too late and buy stocks at too high a value. Intraday traders know who they should mimic.
By using a combination of artificial intelligence and deliberate matching, intraday traders copy trades (within reason) of high-profile traders they are modeling. This again turns the “pump and dump” into an advantage as they get to buy at a pre-pump stage and exit at just the right time, following shortly after those leading the hype and the bust.
That said, please avoid taking a short position while mimicking a leader. While institutional investors can wait till the margin call, you may get a call to return the stocks you’ve borrowed much earlier than they do. Buying and selling stocks to match leaders can help you beat the market in the short term but borrowing stocks while modeling them is risky because you’re not borrowing on the same terms they’re doing.
Technical Analysis
This is by far the most popular method among intraday traders, and if you’ve heard of fundamental analysis, you’ve probably also heard of technical analysis. While fundamental analysis looks at the business behind the stock, technical analysis looks at stocks as products and relies on real-time price data and historical data to figure out where a stock is in its predictable cycle.
If it has higher chances of going up, the trader will buy and sell once the stock is outside the technically safe peak. Technical analysis isn’t a strategy; it is an approach that involves various methods.
That’s important to note because two quants can disagree on a stock’s position while using the same approach. Therefore, you must learn different trading strategies that leverage technical analysis before deciding to use them in the market. Half-knowledge is quite dangerous in investing and trading.
What Is Better: Intraday Trading or Long-Term Investing?
Hating on day-trading has become a fad fuelled by people who entered the market without doing their homework and lost money in the short-term. Now a loud minority dominates the conversation online, arguing for the superiority of long-term investing.
The fact is, long-term investing is good to beat inflation, while short-term investing is good to make money timing the market. Both of these are great for the function they serve and can’t be compared to each other.
If 3% of the money you currently have is enough to cover a year’s worth of your living expenses, then you should invest and hold long-term and live off the capital gains or dividends. But if you want to trade and earn actively, then intraday trading is better for you.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
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Conclusion
If you’ve bought into the hype about fundamental analysis, you may be disappointed to learn that it has little to no use in short-term trading. But you should be happy that you’ve learned this before getting into intraday trading with the wrong approach. If you brush up on your technical analysis and don’t try to take too many risks too quickly, you will gain experience and become profitable much quicker.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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