Combining Technical and Fundamental Analysis

Understanding Technical and Fundamental Analysis

The two disciplines of fundamental and technical analysis are often set against each other and investors may think that they have to make a choice. While technical analysis can be performed on any chart, fundamental analysis, or the study of the actual components of the economy that represents a currency, can be quite a bit more subjective.

Fundamental analysis attempts to determine the value of a share by analyzing a company's financials from its annual report and using qualitative data about the environment in which it operates.  This value is often called intrinsic value.  The simplest form of fundamental analysis is by using fundamental ratios such as the price to earnings ratio or the dividend yield.  

Technical analysis offers a different view of a stock. It is based on the belief that all that is known about a stock is reflected in its price and volume.  The market is made up of a very large number of people who may have very different views on the market, making both long and short term decisions.  The activity of these very large numbers of investors and traders results in different patterns emerging in the market.  Technical analysts attempt to recognize these patterns and take advantage of them when making their investment decisions.

How to Combine Technical and Fundamental Analysis

Fundamental and technical analysis both:

• rely on past and present information
• can add value when it comes to managing risk
• have the same objective of forming an opinion about a stock that will add value to the investment decision making process.

While straight technical analysis is helpful for making short trades, and fundamental analysis is helpful for making longer term investment decisions, some traders employ both methods at the same time. For example, traders might first select a group of stocks that have strong fundamentals, such as high growth rates and increasing earnings. Such stocks might be considered good long-term investments on their fundamentals alone. But by then looking at the technical data, and identifying periods in which those stocks are undervalued, traders can purchase a stock at a bargain price with good odds of the price rising in the near future.

While there are a variety of software packages available to traders, only some of them offer the option of evaluating both technical and fundamental data. Evaluating historical fundamental data can be important, as it allows traders to back test their ideas prior to making any trades.

Both technical analysis and fundamental analysis are helpful ways of evaluating stock data, and determining when the ideal buy and sell points are. When technical and fundamental analysis are combined, however, traders get the benefits of both worlds. And that's the type of trading edge that serious traders should explore.

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