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How to Create a Stock Analysis Strategy

Analyzing stock market data can result in a serious case of information overload. A publicly traded company has so many different variables to investigate that it’s impossible to cover them all. If you want to make a living analyzing and trading stocks, you’ll need to figure out what your goals are. Are you investing for the long haul or trying to turn around a few quick bucks? Buying a new sports car or saving for an early retirement?

Your strategy will vary depending on your objectives, so self-analysis should take place before anything else. Once you’ve established some goals, you can follow this step-by-step guide.

Step 1: Understand the Lingo

Before you analyze any stocks, you’ll need to know what type of trader or investor you are. Not every trader or investor uses the same style or techniques. Trading strategy definitions can be different depending on what you read, but the four main concepts are:

Scalping. This means trading for quick profits, often buying and selling in a matter of seconds. Leverage is used to make big profits off small stock moves.

Day trading. Day traders buy and sell stocks during market hours, but close all positions before the closing bell. No stocks are held overnight.

Swing trading. This type of trading involves holding positions overnight. Swing traders buy a stock and sell it after a few days.

Buy-and-hold investors hang on to their positions for years or even decades. Buy-and-hold investors ignore the daily news from the market and can tolerate volatility.

An overwhelming number of investors adhere to the buy-and-hold method, but active traders usually find themselves among the first three groups. Once you decide which trading strategy to adopt, you can look for ideas by combing through the proper data.

Step 2: Break Down the Data Points

Stock analysis usually falls into one of two camps: traditional data or alternative data. Traditional data is often published on your brokerage’s website.

Alternative data is a vague concept, since many aren’t eager to share their methods. Hedge funds and other advanced trading outfits might use alternative data to find edges in the market not visible through the lens of traditional data sets.

Traditional Data

Traditional data is usually fundamental and technical. Fundamental analysis is all about hard business stats like earnings, sales and debt levels. On the other hand, technical analysis is all about the charts. Technical analysts are often called chartists since all their research comes from viewing pattern on stock’s price chart.

Fundamental Analysis

All stock analysis is an attempt to predict the future. Any person with a smartphone can tell you what a company’s stock has done in the past. But fundamental analysts believe the cold, hard business facts are the most predictive. Here’s a couple of important terms to know, along with a chart that shows fundamental numbers from Apple’s 2019 Q1 results.

P/E Ratio

Price-to-earnings ratio is one of the oldest methods in the playbook. To find P/E, take a stock’s price and divide by company earnings per share. The lower the number, the cheaper the stock is to own.

PEG Ratio

A more descriptive version of P/E ratio, PEG ratio takes the P/E number and divides by annual EPS growth. This prevents high-growth companies from appearing consistently overvalued. A five-year period is usually measured.


EBITDA stands for earnings before interest, taxes, depreciation and amortization. Company valuations are hard to determine, especially when you compare firms across industries. EBITDA attempts to strip certain variables away in order to gauge a company’s profitability in comparison to other companies.

Technical Analysis

Technical analysis contrasts fundamental analysis. Technical analysts care little about a company’s P/E ratio. Instead, technical analysts bury themselves in the charts and look for patterns and indicators that signal potential price moves.

For example, one of the most common concepts in technical analysis is the moving average. Stock price volatility can be smoothed out using moving averages, and support and resistance levels become more identifiable. In the AAPL chart above, the 50-day moving average is above the 200-day moving average, which signals a stock in an uptrend. The 200-day moving average is the support line and the price where a stock seems to always find buyers.

Some of the more common technical indicators and signals include:

  • The Relative Strength Index (RSI), a momentum-based indicator designed to spot reversals from overbought and oversold stocks.
  • The MACD, a moving average convergence/divergence, is the average of two different moving averages used to create, buy and sell signals.
  • On-balance volume is a measurement based on the idea that stocks have higher volume on days when the current trend is being followed. In other words, a fast-growing stock will have more volume on up days than down days.

Technical analysis uses hundreds of indicators and many arguments exist over which ones are best. Critics usually belong to the efficient market hypothesis (EMH) school, just like economists Eugene Fama and Burt Malkiel. They argue that technical analysis is flawed and chart patterns are largely just coincidence.

Alternative Data

Not all the data used by professional investors is published or easily digested. Hedge funds and other institutional investors sometimes use alternative data, which is often a set so large that mainstream data crunching programs can’t handle it. Investing using alternative data exists in uncharted waters since no strategies are currently being made public.

Acquiring alternative data usually requires web scraping or some kind of advanced computer programming knowledge to compile the sets. Alternative sets take in huge amounts of data, which is why only the most powerful trading firms use them consistently.

Some data points considered to be alternative include:

  • Tweets and Facebook posts
  • Credit card transactions
  • Satellite imagery
  • Google search activity

Since very few traders can compile and access alternative data sets, it’s incredibly rare to find out how on the web.

Step 3: Set a Strategy

Now that you understand the main concepts of stock analysis, it’s time to pick a trading style and strategy. If you want to use technical analysis in your stock trading, you can look for short-term strategies like scalping and day trading. Most technical indicators aren’t designed to relay long-term signals, so practitioners day trade or swing trade.

Fundamental analysis can be along with technical analysis to paint a clearer picture of a stock’s prospects. If you’re a strong believer in EMH and don’t want to be an active trader, fundamental analysis will be most useful since it measures tangible things.

Step 4: Use a Stock Research Platform

Once you’ve chosen a strategy, you need data. Thankfully, the internet is home to many great stock research platforms including Yewno Edge. Customers of Yewno Edge get access not only to basic fundamental numbers like EBITDA, but also complex issues like exposure to tariffs or China.

Yewno customers can build a strategy around different concepts like robotics or clean energy using the platform’s AI knowledge graph.

Step 5: Find Actionable Information

After you’re accustomed to your research platform, it’s time to find some actionable data. Fundamental analysts might see a tech company with a low PEG ratio and great sales in the United States and buy the stock in anticipation of more growth in the future.

Conversely, a technical analyst has a completely different definition of actionable information. If you’re looking at charts, maybe you’ll find a price bursting through a resistance level at the 50-day moving average with a low RSI.

Step 6: Buy, Sell or Hold the Stock

Locate the stock and make the trade. Decide how much capital you’re willing to put up for the trade and choose your order type. Remember to have a plan!

If you’re buying Apple stock, you might decide to ride any gains to 10% or cut any losses at 3%. Your trading strategy will inform your plan.

Now, execute your order. A market order will buy the stock immediately at the current price, while a limit order sets a predetermined price where your trade will be activated.

Final Thoughts

Stock analysis can be confusing since there are so many variables to incorporate. Instead of overloading your brain, pick and choose the data that’s important to you. There’s no right or wrong way to invest. Trading style is up to you, but just remember to do all the necessary research.

Want to read more about stock analysis, check out Benzinga’s guide to the best day trading software, the best stock trading software and the best stock charts.

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