Can Technical and Fundamental Analysis be Used Together?
Often, technical and fundamental analyses are viewed as opposing approaches for analyzing the price and value of the stock. However, you can reap huge benefits by combining the two techniques together. There are several ways in which you could use the technical and fundamental methods of analysis together. This article shows you how, so read along to the end to get all the tips.
Ways of Combining Technical and Fundamental Analysis
You can use fundamental analysis to identify a stock that has been undervalued and use technical analysis to find a particular exit or entry point for the specified position. This combination could work well if a stock is severely oversold and is entering a trading position that would be costly.
You could also use fundamental analysis to support your trade as a technical trader. For instance, if you are aiming for a breakout near an earnings report, looking at the fundamentals could help you know whether the stock could beat earnings.
While looking at a price chart gives you an idea of the direction of a trend, thereby giving you an idea of whether your valuation of the market is correct or not. It also enables you to have a great conviction when going against most traders’ directions and prepares you for a quick exit when the fundamentals change.
You could also use fundamental analysis to build a watch list of stocks that you are prepared to invest in and then use technical analysis to decide whether or not to buy them or when to buy them.
Combing technical and fundamental analysis could also be an excellent method of stock picking in which you engage in stock trades in low valuations but with solid momentum.
You could also use technical analysis for growth stocks in an uptrend through good entry levels. Moreover, you can use fundamental research to determine which parts of the business cycle most profit your company. You can then use technical analysis to confirm anticipated trends.
Critics of Use of Technical Analysis
Many critics of the technical analysis methods view this approach as unreliable and based on subjectivity. They often praise Wall Street analysts because they mainly focus on fundamental analysis more than technical analysis.
But why do critics discourage traders from using technical approaches for analysis? Because it is focused on the Efficient Market Hypothesis, which suggests that past trading information is reflected in the stock price.
Hence all information in the market is in the stock’s price, which makes it even better if a trader makes guesses than stock picking. In reality, the Efficient Market Hypothesis is just a hypothesis. As such, investors are left to determine their trading philosophy and figure out strategies that best work for them.
So, What is the Future of Investment Analysis?
Likely, traders will increasingly combine various forms of analysis. However, it is also likely that trading will lean towards a more scientific approach as quantitative investing gathers recognition in asset management.
Moreover, technology has also allowed traders to combine quantitative, technical, and fundamental analysis to be effectively combined. Big data and artificial intelligence have also enhanced the combination of the three forms of analysis. New sources of big data are increasingly being used to find unique insights for combining artificial intelligence, systematic trading, and big data.
If you plan to invest in an unlisted company, the best approach to take is fundamental analysis. However, if you want to trade listed stocks, there is a lot to glean from past trading charts, so technical analysis is a more appropriate approach.
Each approach has its advantages and disadvantages. While fundamental analysis is the best approach to take when investing in the long term, there are a lot of underlying fundamental factors that affect the price of tradeable securities. Hence, despite its critics, technical analysis is a valuable approach to forex trade.
It is expected that more analysis methods will be developed in the future, and the hot contention between the fundamental and technical analysis will decrease. The advancement in technology in trade, such as big data and artificial intelligence, is gradually increasing the use of quantitative approaches to trade analysis.