Stock trading systems can be grouped as long or short term and technically based or fundamentally based. Various technical approaches may be applied either in the long term or the short term. Fundamental analysis looks at the financial health of a company, the sector of the economy the company is in, and at the product line to estimate future prospects for that company. Technical analysis looks at the price activity in the marketplace to try to assess the market’s opinion of the company. All tradings systems are compared against the "buy and hold" benchmark system.
Fundamental systems approach the stock market as a long term investment where the strengths of companies with good products and good management will out-perform the others, but it may take several years for the market to fully recognize value. Analysts in these systems often rely on company by company analysis, and are interested in the product itself and forecast if the product has a future.
If the product has a robust future, the analyst will want to interview management. He seeks to evaluate the managerial attitudes and approaches to making and marketing the product line. Financial analysis is very important. Each jurisdiction has different requirements for public corporations, but the markets the analyst is most interested in will all have transparency laws which make available the audited income and expense statements of public corporations.
Short term stock trading systems are entirely technical. Popular approaches include pattern recognition, expansion in volatility, whether measured by expanding range or by the Volatility Index (VIX), put to call ratios for options, and assorted ratios of up volume, down volume, advancing shares, declining shares, and daily reports of new highs. Trend lines and Japanese Candlesticks are often incorporated into short term approaches. Cycle analysis appears in both long and short term market timing work.
Long term stock trading systems that are technical in nature include econometric models, interest rate models, models based purely on price, and models based on the internals of the stock market. These models all focus on timing the overall rise and fall of the market. Unlike fundamentalists who argue that timing the market is impossible, market technicians point to studies that they say show market timing quite profitable.
Long term technical analysis uses many of the same techniques used on short term analysis, but use daily or weekly chart bars rather than five minute bars. Market internals including volume up, volume down, new highs, issues advancing and issues declining are more often applied in long term stock trading systems than in short term systems.
The standard against which all stock trading systems are compared is “buy and hold.” This refers to choosing a trading index and calculating the percentage of profit or loss that occurs during a holding period. All other stock trading systems are compared to that result, and few perform better, especially net of management fees.