Combining Fundamental & Technical 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. 

This doesn't need to be the case and there is a middle ground.  You can consider combining the two approaches as part of your overall investment plan.

Fundamental analysis 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.  

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 recognise these patterns and take advantage of them when making their investment decisions.

To learn more about fundamental and technical analysis visit the ASX's shares course page and look for:

  • Lesson 10 - Fundamental analysis
  • Lesson 11 - Technical analysis

You could also explore the ASX's range of webinars.

How do I combine 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 overalued or undervalued relative to it's 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

Well respected Australian investor Colin Nicholson 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'

For a sound approach to combining the two disciplines you many want to refer to his book Building Wealth in the Stock Market.

Julia Lee has written an article on the topic called Combining technical and fundamental analysis.