Fundamental and technical analysis are complete opposites in financial market investment strategy. However, is it possible to combine these two techniques and devise a super game plan that utilizes all their strengths and mitigates all their risks? Over the years, many seasoned investors have formulated ways of combining the long-term benefits of fundamentalism with the short-term perks of technical analysis.
Before going any further, it is critical to understand the distinguishing factors between these two tactics and gaining an essential understanding of what they stand for.
Fundamental analysis calculates the fair value of a stock by evaluating economic and financial indicators. The idea behind this type of analysis works on the premise that the market price of a commodity is never an accurate representation of its precise value. Analyzing these economic factors seeks to establish whether the particular share has been undervalued or overvalued.
Technical analysis only uses the market price as a resource. Essentially, all a technical analyst does is examine stock price patterns to determine when to buy or sell a particular stock.
Applications in Trade and Investment
The complex procedure of fundamental analysis establishes it as a long-term technique.How? In this strategy, analysts extensively study the economy, the industry, and the company as one unit. Every factor that does or can influence stock price is considered.
Think about trading relations, company performance on the stock market, financial statements, etc. The company’s entire portfolio goes under scrutiny to establish whether the share has been undervalued or overvalued. The reason behind this process is to identify stocks valued above or below their actual worth.
In contrast, the simple procedure in technical analysis is to predict share price fluctuation. Only looking at graphs of share price patterns is a short-term strategy to predict the next market movement.
This system works great for short-term traders who want to know precisely when to buy or sell a particular stock. Unlike fundamentalism, technical analysts see no mistake in market pricing. They effectively use it as the holy grail of trading techniques.
This brief analysis shows that fundamental analysis suits long-term investment, while technical analysis is perfect for day trading.
How to Effectively Combine Fundamental and Technical Analysis
- Day Trade with Fundamental data. Simply looking at price spikes is an inefficient technique in any trade. Day trading suffers most when it comes to high-impact news or events. An intelligent trader will always look for occurrences that impact price movements, especially in highly volatile financing market circles.
As much as you concentrate on price patterns, ensure you always know what is going on. Check the status of the company share you are trading on, check economic indicators and even high-impact political events. All these indicators will help you make profitable trades.
- Use technical analysis to identify price movement, then apply range-bound trading. This is the most efficient way to combine these two tactics. In principle, you look for a price channel, then use it to buy low and sell high. The idea is to use price fluctuations to identify a potential investment, then evaluate market and financial indicators that will back it as a winning ticket in the long term.
- Don’t pay above a stock’s market value. Although market value is usually never far off from the fair share value, it is important never to go above this figure. The use of fundamental analysis will indicate consistent growth, while technical analysis will show you the price variations. Both used together will tell you the consistency of the share and when it goes up or down. The trick is to apply these techniques to determine undervalued stocks.
- Track Short-term Price Movements. Sure, fundamentalism is all about long-term investment, but you still want to identify a convenient buy-in. Technical analysis is quite handy when recognizing short-term moving averages that may show a long-term pattern. If you need to find a suitable position to buy into or liquidate a stock, technical analysis can help you find a good entry point.
Each investing strategy has its merits and limitations. Put together, fundamental and technical analysis can form a formidable game plan that is immensely profitable. Once you figure out how to merge these two strategies, you will have a trading technique that can take you places.