What is trading?
A process of finding situation where rewards are high and risk is low and putting a part of your portfolio in it hoping to reap the rewards.
- Fundamental Trading
- Only concern is the value of the company and the price we pay for it.
- Also looking and gauging factors which can effect this "value" in future.
- Have to adopt a long term view since price value mismatch may take a lot of time to correct.
- Value and price mismatch is hunted using present net asset value, expected dividends and expected growth in cash or physical assets in future.
- Arbitrage Trading.
- A different style where we try to gain taking the short term price divergence among the value of related things.
- This is more of a shorter term trading, still the core remains of looking at value of related things.
- Technical Trading.
- Momentum Trading.
- May or may not look at value and is more concerned with the speed of change.
- Thinking that what is set in motion would continue to keep moving in same direction for some more time.
- Prices do tend to show momentum (till they suddenly or slowly reverse).
- This is again a short term trading.
- Tend to use momentum oscillators to define relative momentum. (Macd, Rsi, Stock etc..)
- Classical Technical Patterns
- Has no idea of what the word "value" means and is not concerned with it.
- Find patterns in prices. Triangles, Wedges, H&S etc.
- Hope that the outcome would come out as same as what happened when a similar pattern formed earlier.
- Elliott Wave concepts
- A novel way to approach financial markets.
- The idea is interconnectedness of price moves in impulses and retracements over various time frames.
- Has the ideas of price momentum and price patterns built into it.
- Gives the user an understanding of where the current prices "stand" in relation to past price moves and the user can estimate of what can happen in future with some degree of certainty.
- Is much more intuitive than classical technical approach.
- Combining Elliott Wave with Fundamental approach enhances the value of both.
- One can make future estimates of probable price moves from fundamental as well as wave approach.
- Suffers from blind spots when people try to get "too" technically accurate with Elliott wave targets and forget the larger picture from which the theory derives its power and is intended to be used for.
Prices over long term would follow the earnings foot step. Even then Elliott Wave tends to give us valuable clues when something is "close" to its lowest and highest in "many" time frames..!
My sweetest trades have been ones in which I had a clear understanding of the value of a company (first) and then used Elliott Wave ideas (second) to place my trades.
Note: The views are my own and subject to my own understanding and biases.