A tried and true tool for long term investing is the profit to earnings ratio. Buy a promising stock with a low P/E ratio and it typically has a high intrinsic stock value. However, the P/E ratio can also be a useful trading tool. Profitable profit to earnings ratio trading gets you into profitable mid-term trades and gets you out after the market wakes up to a stock’s promise. What is the difference between profitable profit to earnings ratio trading and the use of the P/E ratio in investing? While investors rely heavily on fundamental analysis of stocks trades use technical analysis to forecast changes in stock value. In order to make a profit using technical trading skills a trader needs to be trading a stock that is likely to rise or fall in value. Day traders look for moment to moment changes in stock price and medium term traders look for stocks that the market has over priced or underpriced, often based on a misreading of intrinsic value. Profitable profit to earnings ratio trading happens when a trader spots an overpriced or underpriced stock. He buys or sells short depending on what he believes will happen next and waits for the market to catch up and drive the price higher or lower.
When Does Profit Occur?
Traders and long term investors differ in how to make money in the stock market. A long term investor believes that he can pick a promising stock, buy it, and hold it until it no longer shows promise. He limits his expenses by purchasing just once and, maybe, selling just once. A trader looks to make money in a shorter time span. He will buy and sell when the time is right and collect his profit more quickly than a long term investor. In profitable profit to earnings ratio trading a trader uses the same approach as a long term investor in picking a stock. However, he knows that when the market catches on to the value of an overlooked stock that it will bid up the price in fits and starts and not in a slow and gradual upward (or downward) curve. Often times the majority of profit from a stock occurs in a few days or even in a few hours or perhaps minutes. Using the principle of profitable profit to earnings ratio trading a trader buys or sells short on a stock and waits for the market to correct. Then he takes his profit and goes home before the stock corrects backwards. While the long term investor is waiting for eventual profits after the first move the trade is scouting out other profitable trades.
Return on Invested Time, Effort, and Capital
A high return on investment in trading stocks is the goal of any trader. A day trader pays commissions and fees every time that he enters or exits a trade. Perhaps the most important factor in trading and in calculating return on investment in trading stocks is keeping track of just how much money you make on each trade and how much it costs. Everyone wants to make money trading stocks and the savvy stock trader picks and chooses only the best opportunities in stock trading, commodities trading, or Forex trading. The point of using the P/E ratio as a guide is that it puts you in potentially profitable trades. Then, using technical analysis, you can get in and out with a nice profit while a long term trader will still have his capital tied up while waiting for longer term growth.
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