Supplementing Technical Analysis With Fundamental Analysis in Stock Trading

There are two important research tools that can help an investor make money in stock trading. They are technical analysis and fundamental analysis.

The difference between a technical analyst and a fundamental analyst can be explained by an example of two shoppers. A technical analyst shopper visits a shopping mall, sits on a bench in the corridor and watches the people going into the stores. He checks how many people have bought the product that he too wishes to buy. He does not research the intrinsic value of the product itself.

Fundamental analysis, as the name suggests, studies the intrinsic value of a given product or stock. It is like you go to a shopping mall, visit each store, study the product that you want to buy and then decide whether or not to buy that product.

Technical analysis helps the investor to evaluate the stocks by analyzing the data created by the stock market transactions including the prices and volume of trade over a given period of time. It does not try to evaluate the basic value of a stock.

A technical analyst uses charts, diagrams, graphs and similar other tools to study the past price patterns and use them as a base to predict its future price movement.

It must be noted that both the methods of finding the genuine quality of the product are correct. In case of a technical analyst, if a large number of people are buying the same product, it’s quite possible the future value and the quality of the product is good.

On the other hand, as a fundamental analyst, you conduct your own research about the intrinsic quality of the product from various sources and decide its future value.

What if you could combine both the shopping methods of knowing the quality of the product? Would you not arrive at a more reliable assessment about the product’s quality?

It is the same in stock market.

But some people tend to specialize in one of these two tools. The result is that those who specialize, say, in technical analysis consider it to be more reliable research tool in stock trading. On the other hand, believers in fundamental analysis consider it more important than technical analysis.

It must, however, be noted that since technical analysis takes the market activity of a stock in a certain specific time span in the past into the consideration, therefore, its study generally tends to reveal the price movement of that stock in the near, almost immediate future.

Some people, therefore, consider that technical analysis has more advantages in a short term and day traders and fundamental analysis is more suitable for traders with long-term horizons.

Technical analysts believe that the historical performance of certain securities and markets can indicate their future performance. Obviously, for technical analysis, past market performance of a stock is a surer indicator of its future movement.

You might have read a statutory warning issued along with every IPO or mutual fund to the effect that past performance of a company, stock or a fund is no guarantee about its future performance.

The truth is that the past performance of a stock does affect its future performance to some extent. To that extent technical analysis which studies the past price movement of a stock does help to predict its future moves. It, however, does not take into account numerous other important and decisive factors that determine the future performance of the stock.

The other decisive factors are taken care of by the fundamental analysis and these include periodic financial reports-annual and quarterly reports–, balance sheets, auditors reports, income statements, cash flow statements, notes to the financial statements, discussions, expansion plans, total market capitalization, present orders, future projections and decisions taken in the meetings of the board of directors of the company.

Besides the reports of the stocks of the company you want to trade, you must also be aware of the latest newsflashes released from other sources. These newsflashes should be studied in context of the news and reports about the industry, the general economy of the state and the world at large.

As is clear from the above discussion, you should try to formulate a composite picture of your stock. You can obtain this clear picture only if you supplement one tool of analysis with the other.