How To Track Your Trading Performance: Guide & Best Metrics

How do you measure and track your trading performance? What is the best yardstick that can help you track trade performance? And, how do you know how good you are as a trader? 

Good? Better? Best? Mediocre? Or bad?

• Monitoring trade performance is an important element of trading activity.
• There are hundreds of trading system performance metrics but you can use a few most important metrics.
• It is important to utilize percentages and ratios to track trade performance to get a complete picture of your performance.

“How much money I am making” is the most obvious and clear-cut answer of most of the traders. Sure, money-making is the objective of trading and there is no purpose of trading if we don’t make money. But, the problem is money-making and profits are quite blunt instruments in terms of advising us where and how to be better? They cannot pinpoint where is room for improvement in our trading practices. The best way to track trading performance is to score how we are performing in different areas, find out our strengths, and get to know our weaknesses. And, that is how we can make changes in our trading practices as well as profitability. 

Understand the trading performance first

Trading performance, how to track and monitor trade performance, and how to improve trade performance is the most talked about topics in the world of financial markets. Why so? Because tracking and monitoring trade performance are as crucial for your trading as breathing is for your life. 

So, we know these are important factors to look at but what exactly is tracking trade performance? Monitoring trade performance is a process by which you can monitor and evaluate different trade-related metrics to track your current trading performance and then direct your efforts to optimize it for better output and profitability. 

Although there are hundreds of trading system performance metrics that you can use to track trading performance, only a few of them can do the job with perfection. Using a few trading system performance metrics helps to keep it simple but impactful. You need to focus on the most relevant factors that provide the most insight and help us achieve the best results. 

Most of the traders, despite the importance of monitoring trade performance and trading system performance metrics, overlook tracking and monitor performance. They face the consequences and miserably fail in their trading in the long run. In a nutshell, you cannot underestimate the importance of monitoring and tracking trading performance as it eventually leads you to improve your weaknesses and the highest possible levels of profitability.

It is rightly said that anything that gets improved when measured. Some amateur traders think that tracking trading performance is a useless and tedious endeavor. Conversely, professional traders always monitor trading performance and consider it crucial to their trading success.

What exactly do you need to monitor trading performance? 

Data! It is the most important thing in the world of trading. Data collection is some task and you have to work hard to collect data. There are two main ways through which you can collect data. The first method is rudimentary and non-technical as you manually input all the data in a simple Excel worksheet, Google sheets, etc. The important data include entry and stop price, average win/loss, target price, etc. The second method is more technical. It involves using specialized programs like journal software. Those specialized programs can work in integration with the platform of your broker or as standalone software. The second approach is a better option because the broker’s platform automatically transfers all trading data into your trade journal software. That means it relieves you from manually entering data and also helps boost your trading performance. 

Important trading performance metrics

There are hundreds of trade-related metrics but you should keep it plain and simple. The following are the most important trading performance metrics that can help you track trading performance in an impactful way.

Total number of trades

A total number of trades is an important measure that helps to measure many other important metrics. It will let you know how many trades you did with your trading strategy. A total number of trades help you analyze whether you trade too much, too less, or just the right amount of trades.

Win percentage

Win percentage is an important metric when tracking trade performance that reveals trades resulting in profitable outcomes. You can compare the win percentage with the average win amount to the average loss amount ratio. In most trading systems, when the win percentage is higher, the average win amount will be less and vice versa. 

Largest winning trade

The largest winning trade is a crucial metric for you when you rely on a few big wins to contribute to your overall return. However, this metric isn’t always significant. 

Largest losing trade

The largest losing trade is important in the sense that you can incorporate it into your risk management strategy. It will help you significantly improve your stop-loss or any other risk management techniques. 

Average time in trade

Average time in trade reveals the average holding period of your trades. It is an important metric because you can analyze whether you are holding too long that leads to losses or holding too short that cuts your profits. 

Maximum drawdown

A maximum drawdown is a measure that shows the largest dip from peak to the valley during your trading period. It indicates how much loss you have incurred from a prior market peak. It is an important measure you can utilize to improve your risk management techniques by knowing the maximum drawdown level of your trading strategy. 

Profit factors

Profit factors are also important factors while tracking trade performance. Keep in mind, profit factors alone aren’t enough and don’t contribute much to your overall improvement as a trader. However, they provide a quick picture of the profitability and viability of your trading strategy. Net profit figures, in particular, are more important stats because they are a realistic snapshot as they give figures excluding all related costs including commissions.

Keep your monitoring process simple

Once you have all the data collected, it is straightforward to track trading performance. You can judge right away what you are doing right and where is room for improvement. Moreover, the process of monitoring trade performance is highly personal. It also heavily depends on your trading methods and strategies. If you want to make the judgment of your trade performance more plain and simple, you can make data as visual as possible through techniques like charts. 

Regardless of your approach to monitor trade performance, it is important to keep the process as simple as possible. You should make this process easy that can be completed in a matter of minutes. If your approach is complicated or you are not comfortable with the approach, the chances of impactful tracking of performance are significantly reduced.

The warp-up

Monitoring trade performance is an important element of trading activity. You cannot overlook its importance like amateur traders and see how professionals value it. There are hundreds of trading system performance metrics but you can use a few most important metrics. It is important to utilize percentages and ratios to track trade performance to get a complete picture of your performance. Simply looking at profits and winning amounts don’t provide the whole picture. However, it is also important to keep your tracking process as simple as possible to make it less tedious but highly impactful. 

How Much Money Can a Day Trader Make? (Employee or Independent)

Perhaps everyone familiar with the world of trading is curious about one thing. How much do day traders make? Questions about returns for day traders often arise. But, it is next to impossible to answer those questions. A very few day traders disclose their income. Trading results also vary given trading strategies, risk management techniques, and available capital amounts vary from trader to trader.

• How much can traders make?
• Is it better to day trade your own money or join an investment firm as an employee?
• All the answers are below!

People see numerous claims daily on social media platforms that traders make thousands of dollars a day. Even some traders claim to make hundred plus thousands in a single day. Although these numbers lie outside the realm of the norm but are certainly not out of reach. Day trading is highly unpredictable. How much can you make from trading as an independent trader? Let us say it depends on how efficient and effective your trading strategies and techniques are. 

What if traders are working for some finance companies or banks? How much money do they make when working as an employee? These are some questions this article aims to answer. 

What is day trading and what do day traders do?

Day trading is a type of trading where traders enter a trade, hold their positions for a few minutes or hours, and exit their positions. Its timeframe ranges between a few minutes to hours. Day traders never hold their position overnight. They capitalize on the small fluctuations in prices of stocks, currencies, futures, options, or commodities. 

Day traders make the best use of stop-losses and profit-taking levels to avoid excessive risk. Successful day traders advise not to take risk more than 1% of the portfolio on one trade. The key here is to be always on the safe side and don’t let a single bad trade consume all your capital. Thus, day trading requires discipline and tight control over your emotions. 

Is it profitable to be a day trader? 

The “Is it profitable to be a day trader?” question is a question that has no straightforward “yes” or “no” answer. It depends on the following key factors. 

• How much knowledge, skills, and experience do you have for day trading? Remember that it takes a lot of time to master trading and understand financial markets. Even the most successful traders like Marty Schwartz took 10 long years to start making profitable trades.
• How much time do you have to invest? Start making profitable trades also depends on how much time do you have for trading. 
• How effective and efficient your trading strategies and trading techniques are?
• Are your risk management and money management techniques good?

How much can you earn from day trading? 

How much do day traders make and how much can you earn from day trading? Let us dig a bit deep to get answers to those questions but first things first. Are there any factors that decide how much can you earn from day trading even before you commence trading? Yes, there are a few factors that directly affect your earning prospects. 

1. How much money you have to start day trading? Your earning potential depends more on your capital than anything else. For example, you have $3000 to invest and your friend has $30,000. Your friend has more earning potential than you because he has more money to trade.
2. In which market do you want to trade? Different markets have different earning potentials. So, your earning potential will vary depending on the market type.
3. How much patience do you have? We have already mentioned that it takes years to start making profitable trades. Do you have that much patience and time? Haste makes waste. Once you develop a profitable strategy, system, and approach, you start making money.

Now, let us consider a scenario to give a rough answer to frequently asked questions about returns for day traders. Remember that you do not need to take too much risk to be profitable and make money. Don’t go beyond the 1% threshold of taking a risk. Even with keeping risks at the lowest, you can earn significant money. (Note: The scenario is just for making you understand how much can you earn from day trading. It is an example designed to show the earning potential and doesn’t mean you will also make that much money.)

Consider a strategy that has a maximum risk level of $0.10 and the profit target is $0.15. So, the risk/reward ratio is 1:1.5. A trader with $20,000 decides the maximum permitted risk per trade is $200 (1% of $2000). Thus, to keep the risks within the $200 limit, 2000 shares on each trade are enough. If you make 100 trades in a month, you can win at least 50 trades with a good trading strategy. So,

• 50 successful trades will yield: 50×0.15×2000 = $15,000
• 50 unsuccessful trades will cost: 50×0.10×2000 = $10,000
• The gross profit will be $5000

But, such a theoretical example can only become a reality when you reach a level where you can earn living from day trading. Moreover, figures taken in the scenario are just supposed for comprehension purposes. 

How much money traders make when working as an employee?

Just like the rest of the jobs, traders’ salaries also vary from trader to trader. Their salaries depend on factors like job position, trader’s role, 

seniority, the company they are working for, and even the city of their company. It is difficult to know the exact numbers of traders’ salaries. However, there are a few sources that can give an idea to draw conclusions. 

According to Indeed, an average basic salary of a trader in the United States of America is $85,091 per year plus $25000 commission per year. Performance Radiator is the highest paying company in the USA that pays a trader $302,242 per year. Indeed also reports that Boston is the highest paying state with a $140,253 per year average salary of traders. According to Payscale, an average salary of an equity trader is $82,731. Glassdoor quotes an average salary of $100,283 per year in the USA. These are some figures to give you a rough idea of how much traders earn through jobs. 

Final thoughts

How much do day traders make? Or, How much can you earn from day trading? Such questions have no clear-cut answers. We can’t give you exact numbers. But, we assure you that day trading has a lot of earning potential. As the above scenario indicates, you can earn a good amount of money even if you keep risks at the lowest. 

There is no guarantee that you will make profitable day trades. You cannot predict either how much money you can make. However, there are day trading strategies you should master, manage your risks properly, be patient, and be disciplined to make money. 

Traders who prefer to work as an employee rather than being independent trader also make a lot of money. Their average salaries are in the range of $85,000 to $100,000 per year. However, salaries of trading jobs vary significantly and depend on a lot of factors. Their salaries continue to rise as their experience and efficiency improve.

How To Set The Most Effective Trading Goals

Once Lawrence J. Peters said, “If you don’t know where you are going, you will probably end up somewhere else.” That is the importance of goals in the simplest words. People with vague vision never reach their destinations. They don’t get up every morning with a burning desire in their hearts to do something. They lack goals and have nothing to look forward to. 

• Traders often fail to achieve their goals.
• The main reason of their failure is setting unrealistic goals that aren’t achievable.
• Goals should not be a reflection of your own aspirations, preferences, and needs.
• You have to give a realistic touch to your trading rules to make them achievable.

Goals are important in life. They are not only the expectations and desires, they are a bridge between reality and idealism. Once you set a goal, you accept reality and start working on doing better and cover your shortcomings. 

Goals keep you moving until you realize that even those things make the difference that seems trivial. If you are a footballer, you add 15 minutes to your training session. You run and practice more. If you are a teacher, you take some extra minutes to prepare your lecture. And if you are a trader, you observe and analyze your trading plan and trading systems. You move your stop-losses a pip or more above breakeven. That is how setting goals keep you going and trading goals are not different. 

Setting goals in life doesn’t allow you to be complacent. They continuously urge you to push harder. That is how you become more aware of yourself, your potential, strengths, and weaknesses. Each step you take to achieve your goals allows you to have a better glimpse of your true potential and that zeal becomes your energy. However, your goals should be realistic in life as well as in trading. Setting realistic trading goals isn’t easy as it seems and most of the traders fail to realize their goals. 

Why do traders fail to achieve their trading goals?

Traders often fail to achieve their goals. The main reason of their failure is setting unrealistic goals that aren’t achievable. The following shortcomings lead traders to failures.

• Some traders become too obsessed and preoccupied with their desired success. For example, such as moving a lot of pips in order to make huge profits or cover their losses. They completely overlook the realistic aspects and embrace idealism. 
• Another reason for a trader’s failure might be a lack of solid follow-through. They don’t follow their goals with conviction. It isn’t enough to set goals and sit back thinking happily and expecting things to go in your favor. You have to put in the required efforts and take the necessary steps. 
• Some traders don’t remain committed and disciplined enough to achieve their trading goals. They overlook the fact that trading isn’t like a steady job. It requires utmost commitment and discipline. Whoever fails to do that, fails to reach the destination. 

Must-follow rules to set realistic trading goals

Goals should not be a reflection of your own aspirations, preferences, and needs. You have to give a realistic touch to your trading rules to make them achievable. There are some rules that trading gurus follow to set their trading goals. So, if you want to join the elite class of successful traders, you should map your trading goals with the help of the following rules. 

• Have a strong and definite trading plan that suits your individual needs, personality trait, and financial situation. Setting trading goals without a proper trading plan is unrealistic and useless as per the saying, “A goal without a plan is just a desire.”
• Have a mix of long-term and short-term goals. Having short-term subsequent and progressive goals keep you on track. Achieving smaller and short-term goals keeps your morale high and ensures you that you are heading right towards your long-term goals. 
• Being flexible and moderate is important in the matter of risk management. You should neither be a risk-averse nor a risky player. Finding a sweet between the two extremes can be the key to achieve your goals.
• Don’t invest money that you cannot afford to lose. Trading is highly rewarding but it is also very risky. Traders lose entire capital. Therefore, invest money that you can afford to lose. Keep your financial standing in mind before setting trading goals. 

How to set the most effective trading goals?

It is aptly said that money is just a byproduct if you are making the best possible trades. That should be your inspiration when you set your trading goals. Don’t set your trading goals that revolve around money, return, and pips. Don’t incline your goals towards things you cannot control. Your goals should be oriented towards what you can control. That is why you should focus on becoming one of the best traders. Aim for some short-term goals as well like weekly improving your trading skills, steady progress, etc. That also means that adopting a long-term mentality is also the key. You can set the most effective trading goals by following the tips given below. 

1. Set the odds in your favor

Traders whose first and the foremost goal is self-development turn odds of success in their favor. They realize that the self is probably the weakest link in the trading business. Therefore, it always proves fruitful to continuously work on and develop yourself. Set a long-term goal of self-development and also set short-term goals as well. You can listen to lectures, trading podcasts, or trading books and welcome new ideas. You can also analyze your trading journal and learn what went well and what bad for you. Moreover, you must also learn how to control or keep your emotions at bay. However, your focus should not be only on mental training. Your health is also important. Daily exercise helps you relax and get rid of the negative effects caused by a desk-bound routine in trading.

2. Seek to improve your trading routine

Traders who set goals like improving trading routine and get more and professional also become better traders. A professional approach helps you become a successful trader. For example, if you regularly keep your trading journal updated, you begin to learn a lot. When you begin to review your journal at the end of the day, you begin to understand your trading outcomes. You begin to know why successful trades were successful and why failed trades failed. Similarly, you can also adopt other routine activities that help you achieve success. Thus, setting a goal to adopt a better and professional routine is among the most effective trading goals.

3. Manage your risks

Traders who set trading goals focusing on a risk-management plan can easily minimize losses and maximize profits. Trade with a small amount of money until you master your trading strategy. You need to have a sweet spot between risk-averse and risk-taking. It will help you to make a profit, minimize losses, and keep on trading for a longer period of time. 

4. Be picky

Traders should also set trading goals to trade only the best trade setups and don’t overcommit. It helps you to decrease risk as well as eliminate possibilities of incurring losses.

5. Don’t wait for perfection

Nobody is perfect and probably no one can achieve perfectness. However, you can set trading goals for yourself to make the least possible amount of mistakes. For example, you can closely follow your trading strategy, enter a few trades, don’t break your trading rules, etc. to make the fewest possible mistakes. 

The 9 Hard Reasons Trading Might Not Be For You

Do you know what stats say about the people who set on the journey to becoming stock market or Forex traders? Only 10% of those taste success in the stock market trading and make money. The other 80% lose their money and the remaining 10% achieve break even. That is the topsy turvy world of stock trading. Is it the stock market that presents too many challenges for a common trader or investor? Or, common traders fail to put in the required efforts and time that 10% of successful traders put in? We are going to discuss in this post why you should not be a trader? Why you should never become a trader or don’t trade when you lack in certain aspects? What are those 9 hard reasons trading might not be for you?

• Only 10% of traders taste success in the stock market trading and make money.
• The other 80% lose their money and the remaining 10% achieve break even.
• Trading is a valley full of challenges, trials, and tribulations that everyone can’t face.

What might make trading not for you?

You might like the idea of becoming a successful trader but it isn’t the path that is good for everyone. It is a valley full of challenges, trials, and tribulations that everyone can’t face. Even though it rewards handsomely but only to those who have knowledge, experience, and put in the required effort to be successful.

It is a bitter truth but it is a truth that dreams often lie and unrealistic expectations make you fall. The following 9 reasons show why trading might not be for you.

1. Lack of knowledge

Knowledge is absolute power and lack of knowledge is the worst of weaknesses. Lack of knowledge is the first and the foremost reason that most traders fail to make money when trading. Proper knowledge of the stock market brings success. Some traders try to educate themselves but they look in the wrong places and don’t get proper trading knowledge. The maxim is “don’t trade when you don’t have the required level of knowledge and education of the world of financial markets and trading.”

In simple words, how can you be successful when you don’t even know the basics of the markets, factors affecting the market, and trading rules. Moreover, you also need to have a trading plan and trading strategies that synchronize well with your trading style, money management, and risk management rules. If you don’t have a strong grip over those aspects, then don’t trade, at least not at this level.

2. Lack of capital

You should never become a trader or even think about it when you don’t have sufficient financial power. In simple terms, you can’t trade with the money you can’t afford to lose. Trading is a risky business and financial markets are often volatile. That means, whenever you start trading, you are facing the risks of losing your money. Because of such a high level of risk, you need to be sure not to lose the money that you need for living.

3. Can’t take risks

You should never become a trader if you are risk-averse and can’t take risks. Trading involves risk-taking to earn money. You can’t earn if you don’t take risks. Even when you manage risks carefully, there is always a certain degree of uncertainty because of ever-changing market conditions and volatility. Therefore, if you cannot take risks, don’t trade. Remember the maxim, “High risks, high rewards.”

4. Can’t invest time

Time investment isn’t less important than the capital to start trading. All the successful traders invest a lot of time to acquire knowledge and develop skills. Then they gain the required level of experience. There is no short-cut to becoming a successful trader. Money isn’t enough. You need to invest time and if you can’t invest time, never become a trader.

5. Can’t control your emotions

Trading involves emotions. Emotions are natural and traders are human beings after all. However, all successful traders learn to keep emotions at bay. They can control their emotions. They know how to follow trading plans and strategies without being overwhelmed by emotions. You need to understand before entering a trading profession that sometimes you will make the right decisions and earn. But, sometimes you will make wrong decisions and lose. What will you do then?

Successful traders never become over-confident when on a winning streak. They don’t lose hope either when losing trades. They have their emotions under control. Can you do that? Do you think that you can control your emotions? If you don’t then trading isn’t for you. Take a hard look at yourself and decide never to become a trader.

Moreover, psychology is an important factor in determining why you should not be a trader. Learning to trade is quite easy but understanding psychology is quite hard. Psychology factors always play a part in bringing failures in trading. A trader’s psychology and attitudes not only determine their trading approach but also their approach to financial markets. Emotions like fear and greed drive all those traders who can’t control their emotions. Without proper education, these emotions amplify and can lead you to make costly mistakes.

6. Can’t follow strict rules and regulations

Successful trading depends on your overall plan and strategies. You set strict rules for yourself to follow. You determine how to manage money and risks. You also determine your approach to trading. Those are the rules that don’t let you astray and make silly mistakes. However, if you can’t follow strict rules and regulations, trading isn’t for you.

7. Have unrealistic expectations

Trading is a difficult profession because of the level of risks involved. You cannot think of yourself as an expert after reading a few books, watching tutorials, or having courses. Knowledge is important but applying the correct knowledge is also important. It is the experience that teaches you how to apply the correct knowledge. But, some traders set unrealistic expectations from trading. They dream about becoming millionaires in a few months. If you have unrealistic expectations from trading, then don’t trade. You will lose your hard-earned money because of your unrealistic expectations.

8. Want passive income

If you want a passive income from trading in financial markets, don’t trade at all. It demands you to be active to make money. You can’t earn money while being passive unless you have a large capital. Therefore, if you want to earn passive money, take a turn to invest rather than trading.

9. Lack of passion

Traders who want to adopt the trading profession just to make money often fail. They lack the passion to be successful traders. It takes years to become a successful trader and start making profitable trades consistently. It is the passion, desire, and urge that drive you for that long. If you lack passion, never become a trader.

Best Tools for Fundamental Analysis Success

Whenever you make a trade, you always ask yourself why it is a good idea. Fundamental analysis answers questions arising in your mind. Fundamental analysis is one of the two key stock analysis techniques. The second one is technical analysis. Both require great tools and in this article we’ll deep dive into fundamental analysis tools.

• Fundamental analysis is very effective to measure the intrinsic value of a stock.
• It evaluates the basic information at both levels, microeconomic and macroeconomic.
• The fundamental analysis enables you to gain information that complements your technical analysis.
• Fundamental analysis needs certain tools to analyze a company’s financial health.

Technical vs fundamental analysis

Technical analysis involves the study of historical price and volume data to predict future price movements. The fundamental analysis revolves around studying the financial basics or fundamentals of a company. Financial stats and ratios help to determine the financial status and growth potential of a company. And what else? It gives you a clear idea about the company’s stocks you want to trade. 

Fundamental analysis is very effective to measure the intrinsic value of a stock. It evaluates the basic information at both levels, microeconomic and macroeconomic. It looks into the overall performance of a company at the microeconomic level. On the macroeconomic level, it studies the overall industry conditions and economic factors that affect a company’s performance. 

Even if you use technical analysis to evaluate stocks, you need fundamental analysis as well to back up your trading decisions. The fundamental analysis enables you to gain information that complements your technical analysis. You can easily evaluate a company’s financial position, new developments, or news that can affect stock prices. In other words, you get a broader picture of stock’s potential that leads you toward better decision making. 

Fundamental analysis needs certain tools to analyze a company’s financial health. So, how can you do the fundamental analysis? What are the fundamental analysis tools and how they work? Let’s discuss in detail what are the main and most widely used stock fundamental analysis tools. 

What are the most widely used tools for fundamental analysis?

Fundamental analysis is crucial for stock market traders because it helps traders in many ways. It helps to determine whether the stocks of a company are overvalued or undervalued. Fundamental analysis helps traders to determine the financial health of a company. It also helps to forecast the growth potential and prospects of a company. Fundamental analysis takes the following key factors into account in order to provide such important information. 

• Financial reports
• Productivity and product or service demands
• Asset management
• Management style
• Press releases and news
• Current and upcoming trade agreements
• Government’s external policies and the overall economy

However, the financial report of a company is the most important factor in the fundamental analysis as it affects share prices. A company’s net earnings reveal the progress and growth potential of a company. Higher levels of earnings move stock prices up and vice versa. But, earnings and profits do not reveal all about how stocks are valued in the market. Thus, you need more tools for fundamental analysis. The following tools can help you get an HD picture of a company and its stock’s valuation. 

1. Earnings per share (EPS)

Earning per share is the amount of profit that each stock is entitled to receive. It is calculated by dividing the net income by the total number of stocks. EPS reveals the financial progress of a company and how much shareholders earned in a financial year. 

Fundamental analysts don’t rely on the trailing EPS and calculate current and forward EPS as well. 

• Trailing EPS is the recently completed fiscal year’s EPS.
• Current EPS is the current fiscal year’s project EPS.
• Forward EPS is the forecasted EPS of the next fiscal year.

EPS not only gives a good idea to analyze a company’s performance. Traders can compare it to other companies to find out a better option. 

2. Price to earnings (P/E) ratio

Price to earnings ratio is the second most important stock fundamental analysis tool. It indicates a company’s stock prices in relation to its earnings. A lower P/E ratio reflects higher incomes in relation to the prices and its stocks are a good trading option. Conversely, a higher P/E ratio signifies lower incomes as compared to stock prices. It means stocks are overvalued and aren’t a good trading option. An average P/E ratio suggests undervalued stocks but with the potential to go up in the future. 

The importance of the P/E ratio as a fundamental analysis tool varies from one trader to another. It indicates how much a trader or investor is willing to pay for stocks in relation to the company’s earnings. Thus, willingness varies from person to person, as does the importance of the P/E ratio as well.

3. Return on equity (ROE)

Return on equity reflects how much return shareholders get in comparison to their equity. Companies with higher ROE show their efficiency of generating higher profits against shareholders’ investment. Those companies are good options for stock trading or investing. But, companies without much equity and assets also have higher ROE. Therefore, a higher ROE doesn’t necessarily mean good trading or investment opportunity. You should compare a company’s ROE with the other companies in the same industry. The ROE of a company between 13 to 15 usually indicates a good opportunity to invest in stocks of that company. 

4. Price to sales (P/S) ratio

Price to sales ratio is another important tool for fundamental analysis. It indicates a company’s efficiency to generate revenues as compared to its stock prices. A lower P/S ratio suggests undervalued stocks while an above-average P/S ratio indicates overvalued stocks. 

5. Price to book (P/B) ratio

The price to book ratio is a comparison of a stock’s book value and its market value. It is an important fundamental analysis tool that reflects whether a company’s assets are at par with its share’s market value or not. Companies in the finance, investment, banking, and insurance sectors value the P/B ratio more because of their higher liquid assets. Companies having more fixed assets get very little help from price to book ratio. In general, a P/B ratio greater than 1 indicates overvalued stock, and a P/B ratio less than 1 signifies undervalued stocks.

6. Dividend yield and payout ratio

These are among the key fundamental analysis tools. Dividend yield indicates how much dividend shareholders received as compared to stock price. The dividend payout ratio signifies how much dividend shareholders received from a company’s total net profit. 

Final thoughts

Fundamental analysis is one of the two main techniques to analyze the stocks of a company. Technical analysis involves the study of historical price and volume data to predict future price movements. The fundamental analysis revolves around studying the financial basics or fundamentals of a company.

Fundamental analysts make use of some key fundamental analysis tools to predict or forecast future stock prices. If analysts expect a company a better performance, they invest in that company. The reason is the forecasted future prices are higher than the current market prices. Conversely, they consider selling stocks when stocks are overvalued because the intrinsic values of stocks are low. Thus, fundamental analysis tools can help you get a clear picture of a company’s financial performance. And, help you closely monitor the stocks you want to trade or invest in.