As we know, a stock (or share)[1. the term share and stock can be interchanged] of a company is nothing more than a piece of that company. If a company has 2 million shares and each of the share has price of $10, then the total value of that company is $20 million.

A trader can make profit basically by buying a company share at certain price, say $10, and sell it at higher price. The problem is that no body can actually have the power to direct the price movement (go up or go down) except the market mechanism itself. Read “How The Prices Moves in Market” article to see more detail. So, in other word, any trader do not have any direct control that let he/she knows whether the price will go up or go down.

If it’s the case, then what makes some traders are really profitable and on the other hand some are really loser?

In general, there are 3 dominant factors that determine whether a stock price of a company go up or go down:

1. The Fundamental Factors of that company
2. The market sentiment
3. The Technical Analysis factors

The Fundamental Factors

On of the main factor that determine the condition of a company is how profitable the company is. If the net profit is growing quarter after quarter, then the value of the company will go up as well. SInce the number of share is constant, then the price will go up.

There are also so many other factors that can shape up the fundamental condition of a company such as: whether the debt is under control, price per earning ratio, company growth, market share, product diversification, etc, etc…..

Fundamental factors is more important in longer time frame investment (multiple years)

The Market Sentiment

This factor is quite hard to determine. We cannot predict what is exactly the market really want at certain time. You can see this factor as the “mood” of the market as a whole. If Dow Jones Index down 400 points overnight, then Australian stock market will almost certain to be down as well because the sentiment is negative.  If there is terrorist attack, the mood become negative. This factor is the one explain why just after GE (General Electric) announced that their profit has increased, the whole market bounce back from going down to rally up.

What we can be certain is only one: if there are too many seller then the price of the stock will go down, and if there is too many buyer, the price will go up…

Market sentiment is more prominent for short term price movement.

The Technical Analysis Factors

This third factor is becoming more and more prominent as almost all traders in the world use technical analysis as their tool. As we know, technical analysis is a technique using historical price data to determine or to forecast price movement in the future based on the premise that people will tend to repeat its decision based on similar condition. The more people applying this technique, it become self fulfilling prophecy.

For example, market sentiment is strongly down and Dow Jones Industrial index has already down 3% and heading to 8000 point. Fundamental factor also negative as the last few days most company announcing profit downgrade and millions dollar of losses. But suddenly once the index hit 8000, the market bounce back and setup a strong rally. Why ? Because from technical analysis point of view, 8000 is a strong support and many trader sitting on the fence waiting 8000 to be reach and they will jump in to market as a buyers that drive the markets up.

Technical Analysis factors is more important for short to medium term price movement.

Conclusion

In order to profit, a stock trader need to correctly determine the price movement of the stock based on 3 factors above (Fundamental Factors, Market Sentiment and Technical Analysis Factors) to fit his own time frame of investment. With good fundamental, in long term the stock of a company will go up in value, but other 2 factors will determine the shorter term price movement. Since nobody is able to predict the market consistenly risk mitigation / trading plan is more important than picking the right direction of a stock.

Denis Kristanda