Can Fundamental Analysis Be Used In Intraday Trading?

Can Fundamental Analysis Be Used In Intraday Trading?

Can Fundamental Analysis Be Used In Intraday Trading: Intraday trading has been gaining a lot of traction in the equity markets nowadays. When beginners or first-time traders hear about this concept for the first time, they picture themselves generating significant returns in the time period of just 24 hours. While intraday trading can result in profits, it can also lead to significant losses. Traders use and capitalize on a range of information to earn profits on an intraday basis.  

Beginners think that intraday trading is very exciting and daring. However, they may be mistaken. Actually, intraday trading mainly means how to move ahead with discipline in several areas. A lot of effort goes into selecting stocks to trade intraday. It is important to remember that traders cannot trade intraday on any stock. Traders need to be extremely selective. If they want to be successful, they need to understand that the key to any successful trade is selecting the best stocks. However, for intraday trading, traders need to be even pickier as they have to open and close trades on the same day. In such a limited time, traders need to think of the best possible ways to generate profits.

Stock analysis can be done through 2 methods- Fundamental analysis and technical analysis. Fundamental analysis focuses on assessing the intrinsic value of one stock. It mainly combines financial statements, the external environment, events, and trends in the industry. This value does not change overnight. Such analysis is helpful as it can identify the main attributes of the company. Fundamental analysis examines the stock’s actual worth, after considering the macro and microeconomic factors. 

Now that we have understood the basics of intraday trading and fundamental analysis, let us try to find can fundamental analysis be used in intraday trading? Read on!

Fundamental analysis is for long-term investors 

It is generally advised that traders should not get distracted by the fundamental analysis when the focus is on intraday trading of forex, stocks, or futures. Fundamentals are important for long-term investors.     

What comes on the company’s balance sheet will not matter much for a trade that lasts 5 minutes. Some companies have awful balance sheets and can be loss-making ones, yet they can rally for months. On the other hand, some companies can be strong financially, having great earnings and revenues, yet their share prices can drop for consecutive days. Simply put, fundamentals don’t matter when the focus is on executing short-term trades. 

Anything can happen within a day. The price can move in both directions. Day traders are not required to analyze the financials of the company. Such analysis can bias their trades. 

  • Time Duration

Intraday trading focuses on short-term movements in stock prices. These movements are governed by a range of technical parameters, derivative analytics, news, etc. Fundamental is a long-term analysis and doesn’t consider the short-term impact on the prices. Since intraday trading is for a shorter time duration, fundamental analysis can provide no value to the traders. 

  • Opportunities

The fundamentals of the company do not change daily, but the opportunities behind the movement in the prices can be captured with the help of intraday trading. Intraday trading helps traders to generate returns based on short-term opportunities such as news, results, change in the company’s management, etc. 

  • Monitoring of one fundamental data is required

In intraday trading, traders are not required to closely follow the news or be known of the financial condition of a company or the economy. However, they need to know when earnings and economic reports are expected to be released. Even though the actual numbers don’t matter to the traders, such news can result in big swings in prices. 

  • Usage of different analysis tools

Different tools for analysis are required for different methods. Fundamental analysis requires growth projections, revenue estimates, possible reasons for growth or decline in the core parameters, etc. Technical analysis, on the other hand, requires price patterns, indicators, etc. Therefore, intraday trading focuses on several technical parameters, chart analysis, price-volume action, breakouts, etc. These parameters have nothing to do with fundamental analysis.

Selection of stocks-Parameters used

Different parameters are used for selecting stocks for intraday trading and long-term investing. For intraday trading, the following parameters are used:

  • Liquidity

Liquid stocks are the ones having large volume trading throughout the day. This is the single most important criterion when it comes to selecting stocks for intraday trading. There are 2 benefits attached to this criterion. Firstly, traders can buy and sell shares in large quantities without impacting the trend. Secondly, the trades which are lined up can be executed quickly. 

  • Follow the indicators

If you want to succeed as an intraday trader, you should be able to accurately predict the movements in the short term. The chances of success are improved if traders follow the group trends and indicators closely. 

  • Trading with the trend

Even though some traders specialize in playing contrarian bets, most traders prefer trading intraday with the trend. Therefore, an intraday trader needs to spot the waves of a stock market trend, and then they should try to book profits on the basis of these waves. This is possible by conducting an intraday trading time analysis.

For long-term investing, the following parameters are used:

  • Good current and projected profitability 

When selecting stocks on a fundamental basis, it is of utmost importance to assess the company’s financial fundamentals, such as earnings, operating margins, and free cash flow. If investors put together these factors, they can have a fair idea about the company’s financial well-being. 

  • Capital structure

Some fundamental analysts give weightage to a capital structure while selecting stocks. Capital structure refers to how a company funds its operations. Therefore, capital structure is one of the most important parameters for selecting stocks on a fundamental basis.

Since the criteria for selecting stocks are different, using fundamental analysis will not be beneficial for day traders.

Also Read: What Are The Merits And Demerits Of Fundamental Analysis?

In Closing

Fundamental analysis is a tool that is mostly used by long-term investors. It is not a useful resource for day traders. Intraday players are better off stepping aside at the time of news releases. They are advised to stick to trading ​the price patterns which occur often throughout the day. Fundamental analysis will not impact the company’s price movement on a regular basis. Therefore, this method is not beneficial for a trader’s mentality. That’s all for the article Can Fundamental Analysis Be Used In Intraday Trading. We hope you enjoyed reading it. Happy Investing!

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