Fundamental and technical analysis are two completely different approaches to investing in shares. Some investors like to use one or the other, however, there can be a middle ground. You could consider combining the two approaches as part of your overall investment strategy.
Fundamental analysis (FA) attempts to determine the value of a share by analysing 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 to inform your investment choices.
Technical analysis (TA) is the study of historical price and volume performance and is often called charting. Technical analysts assume that the market knows all the key fundamental information about a company and that this is already factored into the current price. They use price and volume information to identify patterns that have a high probability of providing profitable trading (shorter term) or investing (longer term) opportunities.
Colin Nicholson, an experienced Australian investor, combines both technical analysis and fundamental analysis in his investment approach and says:
'The two forms of analysis complement each other by adding value to the other. My approach is to employ the strengths of both'
Practicalities of combining fundamental and technical 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.
Combining the two disciplines does not need to be complicated. You could use: