In this mini-series on swing setup, we will try to understand the various facets of a swing setup. We will mainly look at the importance of fundamentals, how to look at swing trading on various charting methods, and how to trail these trades. In today’s newsletter, we will look at using fundamentals of a company to select the stocks that can be good candidate for a swing setup.

Fundamentals of a company are often ignored by majority of traders when analyzing technical charts. This is because of the preconceived notion that fundamentals are of little value to trading and it is only looked at when investing. Today, we will try and understand why the fundamentals of a company can make stock selection simpler. In the previous newsletters, we had discussed various fundamental metrics. If you have missed that, do read it.

Fundamentals in trading? But why?

Fundamentals of a company show the financial strength of a company. They show the quality of a business and ability of the management to grow the business. Growing fundamental metrics Year-over-Year shows that the management is able to scale the business model and is able to generate returns for its shareholders.

This is the logic from an investment perspective. But this can be advantageous for a trader as well. From the 2000 to 3000 publicly traded stocks, how can a trader choose the stock that could show a consistent trend? How can a trader avoid being trapped in “pump and dump” stocks? Even if the stock is relatively outperforming, it can be part of these kinds of stocks.

When we choose a stock based on improving fundamental metrics, we are essentially looking at those stocks whose price growth is justified. The fundamentals act as a reason for the price increase and the uptrend. Also, when a company is able to generate returns for its shareholders, the demand for those shares will also increase.

Key metrics to look at

In the precious newsletter on Fundamental metrics, we had discussed some important metrics such as Sales, Operating profit margins, Net profit and Net profit margins, and Cost of goods sold. These metrics show the growth, efficiency and net profitability of a company.

Growth in sales shows expansion, pricing power, and ability to retain customers. This can translate into bringing in more money into the business other than the capital raised. Lower Cost of goods sold can indicate company is able to negotiate or manage its raw material cost efficiently. Improving Operating profit margins indicate that the company can manage the cost of operating the business efficiently as well. Improving Net profit and Net profit margins show the ability of the business to generate pure profits for the shareholders of the company after. By pure profits I mean the profit after meeting the obligations from the lenders of capital and Government.

When we talk about swing set up, we need companies that are in a clear uptrend and are supported by strong fundamentals.

For these setups, we can look at the following metrics:

Sales growing more than 10% Y-o-Y,
Operating profit margins of more than 25%, and
Net profit margin more than 8%.

We can also focus on 3 year CAGR (Compounded Annual Growth Rate) of Net profits; higher the better. A trader could use stock filters available on the internet and group them. Although these are essential metrics to look at, this is not an exhaustive list. Analyzing fundamentals is more than just looking at numbers.

In the coming newsletters, we will look at how companies showing these traits look on chart and how a trader can participate in these stocks.

How analyze the fundamentals of a company is a skill that can be refined over the years. I have learned this over the years as well. Fundamental analysis is one of the modules in my newly launched course “How to trade Breakout and Pullbacks”. If you are new to the markets and want to learn more about this, do check out TNT One membership. 👇🏻👇🏻👇🏻