How To: Building a Trading Thesis

Wed Jun 15, 2022, 02:14 pm | by Abbey Polin | No comments

What is a Trading Thesis?

A thesis is simply your reason for trading. 

Having a thesis helps you determine your entry and exit point. Think of it like a guide to keep you on track. Having a thesis also allows you to think about why you’re purchasing the stock, how it’s going to benefit you and when you will get out of the trade.

An important thing to think about when you’re creating your thesis and thinking about stocks to buy is using your current knowledge about a company and applying it to the way you trade. This is true if you’re investing in a new company as well. It’s often recommended to “trade what you know.” Understanding the market and position will allow you to better understand when to get in and out. 

What To Consider 

Revisiting your initial thesis is crucial because sometimes the market changes and you need to re-adjust your initial plan. It’s also okay to continue using your thesis as long as it is working in your favor. In the same token, when your thesis is no longer working, make sure to get out of that position and reassess. It no longer benefits you. 

Things that can impact your thesis and also can aid in forming your thesis are:

  • geopolitical issues
  • news
  • technical trades

To develop your thesis and be successful, it’s important to look at:

  • the company’s earnings
  • how much money they’re spending on R&D
  • company’s cash flow. 

Trading with your thesis allows you to know what to look for and develop your own set of trading rules. 

In addition to that, traders should also have a “get out” price. This price is your cue to know when to get out of your position and discontinue that thesis. 

The news has a great impact on the stock market and can be detrimental if negative news is reported. Some companies will factor news into the price of their stock. This means the stocks are priced to withhold some impact that the news can generate so it bounces back quicker. 

A Strong Thesis Requires Research

Knowing the ins and outs of a company will help you in the long run. Putting in the work and understanding where a company stands financially and what its plans are crucial. 

Spending money and time on research and development will help the company grow and hopefully become more profitable. So, if a company looks like its spending a lot on R&D, it could be a good thing. For example, according to Recode, Amazon spends about $23 billion on R&D to continue improving and being a leader in the tech industry. Knowing this information is valuable because it allows traders to prepare for what companies have in store and it gives them a look into what the stock performance might look like. 

Another thing to look at when deciding to purchase a certain company’s stock is their cash flow. Cash flow is a good indicator of the risk that pertains to the stock. A company with higher cash flows typically have lower risk. 

There are elements that impact the stock price and performance outside of the companies immediate control: factors that deal with the economy. Micro and macroeconomic factors hold great weight in the stock market, so when developing your thesis, it’s important to understand what is happening with the broader economy and how it can impact the market and specific industry you are trading. 

Resources For Building a Trading Thesis

Having good resources to get the information you need to develop a strong thesis is important. Here are some websites and tips we recommend:

Benzinga provides financial news and analytics to investors. Benzinga has a news desk that is continually finding information and making it available to investors as soon as it hits the headlines. It 

Benzinga Pro is a subscription-based real-time news streaming service packed with trade alerts, market screeners, audio alerts and much more. See how this stock market news platform compares to the competition. A stock market news streaming application with everything you need to trade smarter. 

Seeking Alpha is a content service in which contributors can submit their own thesis or commentary on stocks. This is helpful for new traders or traders looking to improve their thesis development techniques. 

Staying current with analyst ratings is important because it allows traders to see and what the analyst says and their interpretation whether to buy, hold, or sell a stock. Looking at the industry analysis is also good because it gives investors insight into the industry as a whole. 

Researching company values is a good way to find what the company holds important. This can help traders understand where a company spends their money and what kind of outlook they have for the future.

Having a trading thesis has many benefits. It helps traders understand when to get in and out of a position. It also could help traders become more educated within their preferred companies and industries. There is a lot that goes into making trades so traders need to be prepared for however the market moves. 

Disclaimer: Benzinga is a news organization and does not provide financial advice and does not issue stock recommendations or offers to buy stock or sell any security. Benzinga Pro is for informational purposes and should not be viewed as recommendations. Benzinga Pro will never tell you whether to buy or sell a stock. It will only inform your trading decisions. You can find our full disclaimer located here.