Combining fundamental and technical analysis

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.

Let's recap

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:  

Fundamental analysis to: 

  • select stocks to include in your investing universe or 'watchlist'
  • determine whether a stock is overvalued or undervalued relative to its intrinsic value
  • avoid overvalued stocks or high debt companies to lessen risk 

Technical analysis to:

  • time the entry into an already filtered fundamentally sound stock
  • manage the investment
  • time an exit for the investment 

Remember, there is no right or wrong way to invest in shares - you will need to find out what type of strategy or approach resonates with you and the only way to do this is to explore and learn about a few. When you have narrowed your search down, take the time to learn more about your chosen approach/es and start to develop your own investment strategy based on your learning.

ASA Stock Market Course

The ASA Stock Market course covers fundamental and technical analysis.

The first module is free, you will need member access to view the entire course.

Colin Nicholson shares his own investment plan combining the use of technical and fundamental analysis in his book Building Wealth in the Stock Market.