Science Behind Stock Trading

For someone who is not well versed with the stock trading stuff, it all seems gibberish. There is some graph that’s constantly fluctuating by some amount starting at 9am in the morning and ending at 4:30pm – 5pm in the evening. The whole world has its eyes on this little graph that defines whether the economy is growing or contracting. You may also have heard about stock traders who make their living from these fluctuating stock markets.

The graphs that we are talking about represent the growth and fall of a company’s performance. It is affected by a lot of factors. It is largely affected by the emotional response of the traders and investors worldwide and also the factors such as demand and supply, production output, and so on.

Emotional response

There are so many things to look at when it comes to emotional response. Take a case of a company where its CEO resigns out of the blue. The news spreads like a wildfire. The stock index of the company drops by several points. This is because the investors and traders lost some confidence in the company due to this news and decided to sell the company stocks thereby reducing its index value in the market.

In another case, a huge storm has hit the production plant of company X and the result being reduced production output and lot of damage. This factor could also result in lowering of company’s share value in the market.

Changes in share value

On any given day, there are more than 3 to 4 reasons for a large change in any company’s share value in the market. Stock traders have to be vigilant about these various factors if they are dealing with a particular company’s shares. In addition to that they need to monitor the market performance as well including any active rumours. As we saw earlier, the stock market is highly volatile and emotional. Rumours about a particular company can cause a huge rise or a drop in share value and sometimes be responsible for a very large change in the stock index. Although such cases are very rare, but not impossible.

The facts that we just saw build the basis for fundamental trading strategies which do not involve much mathematical calculations. Fundamental trading is based mostly on the science of psychology and guessing which stock will rise and which one will fall.

Technical trading

On the other hand, technical trading has a mathematical base and it can be helpful in predicting future developments for a particular chart. By studying the history of the company’s developments, mathematical models can be established for futures trading. For example, the Elliot wave helps us establish a staircase pattern.

There can be various graphs such as the median graph, moving average, candlestick graph and so on. All have their own purpose. Stock traders often resort to calculations and predictions based on several of these charts and not just one. Information seen in the candlestick chart will help the trader understand the resistance points and in turn help in determining the point where the share value can be expected to rise.

In comparison to fundamental trading, technical trading requires chart setups and mathematical know-how. Although in both the cases, one needs to be quite well practiced and used to trading stock because when something goes down, the trader needs to take right decisions at right time. That is why, many people interested in investing their money resort to mutual funds and brokers who are experts in trading and experienced with the volatile stock markets of the world.  Happy investing!

Images: ”Global Currencies, stock market chart/ Shutterstock.com“

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