How To Combine Technical and Fundamental Analysis and Its Benefits

Decoding Fundamental Analysis

The previous module explored the strengths and weaknesses of technical analysis and also highlighted the need to take fundamental analysis seriously. In this module, we will start by understanding fundamental analysis a little better. This analysis style helps you study and assess a business holistically, especially before investing in it for the long run. 

You need to evaluate a company’s overall financial health, growth prospects, earnings, and dividends through balance sheets, income statements, cash flow statements, etc. Why so?   

Over the years, the shares of a company that is fundamentally strong usually gain value, and this leads to wealth creation. Hence, looking beyond short-term fluctuations in stock prices and focusing on a business’s underlying performance is crucial. 

Benefits of fundamental analysis: 

• Spots companies that are worthy of long-term investment 
• Identifies businesses whose stock price overvalued or undervalued their actual worth  
• Suggests when to enter and exit trading positions 
• Gauges the risk associated with different companies and industries 
• Indicates which companies will thrive and which ones will struggle in the face of changes  

Decoding Technical Analysis 

Technical analysis involves the study of historical price and volume data to predict stock price movement and market behaviour in the future. It is useful in generating short-term trade signals and evaluating a security’s strengths and weaknesses.  

You can use technical analysis to develop a point of view in terms of the buy and sell price of an instrument, expected risk and return, and expected holding period. There are a multitude of charting tools and indicators available for the same. While some help in understanding the existing market trend, others help identify support and resistance levels (the level till which the price falls or rises usually) on a price chart.  

Benefits of technical analysis: 

• Provides a rule-based, objective approach towards trading 
• Helps comprehend an asset’s journey, spot recurring past patterns, and identify trends through charts 
• Helps access many analytical tools easily 

So, how are fundamental and technical analysis styles different?  

Fundamental Analysis vs Technical Analysis 

Parameters	Fundamental Analysis	Technical Analysis
Meaning	Focuses on a business’s basic aspects.	Considers historical data on stock price and volume.
Assumption	Forecasts a company’s potential for growth by studying its fundamentals.	Current price of a share factors in all the necessary information.
Goal	Determining a company or stock’s intrinsic value.	Forecasting a share’s price trend in the future.
Data	Depends on economic data and financial statements.	Depends on historical data regarding share volume and price.
Time horizon	Used for long-term investments.	Used for short-term trades.
Interpretation	Buy a stock if it’s undervalued and sell it if it’s overvalued.	Analyse price trend charts and use multiple indicators to determine entry and exit points.
Indicators	Revenue, net profit, liabilities, assets, financial ratio etc.	Moving averages*, RSI*, and MACD*, etc.

*Moving averages – Indicators that smooth price trends by eliminating the noise created by short-term fluctuations in price. 

*RSI or Relative Strength Index – Momentum indicator that assesses the size of recent changes in price to analyse oversold or overbought situations. 

*MACD or Moving Average Convergence Divergence – Momentum indicator that depicts the connection between two moving averages (based on two different time intervals) of an asset’s price. 

So, while investing, it is not about choosing one form of analysis over the other. Rather, combining the two can create a more comprehensive approach while minimising the shortcomings of each analysis style, as listed below. 

Fundamental Analysis Pitfalls

• Time-consuming 
• Unsuitable for short-term trading decisions
• Qualitative factors are subjective (vary across analysts) 
• In the short run, the market might not reflect a stock’s intrinsic value

Technical Analysis Pitfalls

• Commonly used indicators might cause herd behaviour among investors, skewing the market
• Fluctuations in the short term can cause false signals
• Different analysts view patterns, approaches, and indicators differently 
• The financial health and performance of the underlying asset are usually ignored 

Let’s delve into the benefits of combining fundamental and technical analysis and how to go about it. 

Benefits of Combining Fundamental Analysis and Technical Analysis 

It is widely recommended that fundamental and technical analyses be combined. But what will that facilitate? Below are some benefits of using them in conjunction with each other:

• 360-degree stock perspective: Blending fundamental and technical analysis can give you a holistic view of any stock. While fundamental analysis offers more visibility into the financial health of a company, technical analysis gives a good idea about possible price movement and market sentiment. 

• Predicting long-term value and short-term movements: Technical analysis enables short-term investors and day traders to spot stock price movements and immediate opportunities. Long-term and value investors can use fundamental analysis to assess the long-term value proposition of a company. 

• Minimising each analysis type’s weaknesses: While technical analysis can overlook shifts in the industry or economy, fundamental analysis might not respond to sudden changes in the market. Hence, combining them can give your investment approach more resilience, as the strengths of one analysis type balance the weaknesses of another. 

When To Combine Fundamental Analysis and Technical Analysis? 

Below are some situations where combining fundamental and technical analysis can be invaluable: 

• You want to Know What Other Investors are Thinking

While researching a stock, knowing the sentiment of other investors can help you gain additional insights or learn about a developing trend. You can check the volume recently traded to assess the market sentiment, for instance. If you see big spikes, it means the stock has drawn ample attention from traders. Volume indicators confirm if other investors share your perspective on a particular security. For instance, if there is an increase in the volume, you might gain from a trade. 

• Want to Track Short-Term Movements 

Though long-term investors bank on fundamental analysis, it still helps to know the favourable buy and sell prices in the short term in case you suddenly wish to liquidate a position. In such a scenario, technical analysis can be useful. Tracking short-term price movements also helps you time your entry or exit accurately. 

• Want to Track Performance over Time

In fundamental analysis, studying the chart of a stock, index, market, or industry can help you decide how that entity has previously performed in the face of different news or events. Since patterns often repeat, if investors were discouraged by a certain piece of news in the past, they might react the same way in the future. 

How to Blend Fundamental Analysis and Technical Analysis? 

Assess your investment style, goals, and risk appetite before combining technical and fundamental analysis. It will help you decide how much weightage to give to each type of analysis.  

Start with Fundamental Analysis and Move on to Technical Analysis

You can begin by examining a company’s position in the industry and its financial condition. Shortlist stocks based on that and move on to technical analysis. It will help you understand market sentiment, the best possible entry and exit points, and short-term movements in price. 

Consider Platforms for Combined Analysis 

While assessing a tool or platform, check for the following features:

• All-in-one dashboard – To view the financial metrics of a company along with the movements and patterns of its stock price 
• Filters that are customisable – To filter stocks based on different technical patterns and fundamental metrics 
• Real-time information and notifications – To receive data updates instantly and get alerts for certain price movements or when a financial metric reaches a particular threshold 
• Access to historical data – To understand the future trajectory of a stock by studying historical stock patterns and financial metrics 

Interpret Combined Data Correctly 

Note the following to capitalise on both fundamental and technical analysis: 

• Since stock markets are volatile, always stay aware of every event. It can affect the fundamentals and the stock price of a company. 
• Reconsider your position if your technical analysis and fundamental analysis don’t line up. Don’t just depend on data that supports your current beliefs. 
• A strategy that worked in the past might not work in the present or future as market conditions change. So, tweak your approach when necessary. 

Stock Selection Using Fundamental and Technical Analysis  

Say, there is a company called ABC, and you want to combine fundamental and technical analysis styles before investing in it. Here is what to do:

Fundamental Analysis

• Analyse ABC’s net income, revenue, and earnings per share in the recent years. Were they growing consistently or displayed signs of distress? Examine their assets, liabilities, equities, liquidity, and overall financial health.  
• Evaluate both historical and forecasted earnings besides revenue growth. 
• Find out if ABC offers dividends. If yes, analyse the history and payout ratio. 
• Examine ABC’s management team and their track records. Delve into recent changes, strategic decisions, and corporate governance practices. 
• Study ABC’s industry and identify market trends, disruptors, and competitors that might affect ABC’s future performance. 

How To Do Fundamental Analysis on Angel One?

1. Open the Angel One App and find the stock you want to analyse from the Search bar.
2. Click on ‘ ‘Stock Details’ and then on ‘Fundamental’. 
3. Here, you can scroll down and check the fundamental analysis of the stock you are viewing.

Technical Analysis 

• Use charts to understand how ABC’s stock price moved historically. Identify support and resistance levels, trends, and other patterns that might influence future price movements. 
• To spot trends and possible reversal points, apply moving averages. If a short-term moving average crosses above a long-term moving average, it might indicate a bullish market or that the stock price will increase. 
• To determine whether the stock is oversold or overbought, estimate the RSI. Look into momentum indicators to examine the strength of recent movements in the price. 
• Analyse trading volumes, as a surge, means that investor interest in the stock is strong. 
• Identify the main resistance and support levels so you know when to enter and exit a trade and predict price reversals. 

How To Do Technical Analysis on Angel One?

1. Open the Angel One App and find the stock you want to analyse from the Search bar.
2. Click on ‘ ‘Stock Details’ and then on ‘Technical’. 
3. Here, you can scroll down and check the technical analysis of the stock you are viewing.
4. You can also perform further technical analysis on your own by going to the chart of the stock and adding indicators.

Combined Analysis 

• Check where the signals from fundamental and technical analysis intersect. For instance, if fundamental analysis hints at an expansion of market share and strong growth in earnings, while technical analysis indicates a bullish trend, you can benefit from investing. 
• Identify risks from both types of analysis and employ management strategies. Setting a stop-loss order (a predefined price where you exit a trade to minimise losses) is one example. 
• Consider your investment horizon. Fundamentals impact your decision more if you are investing for the long term, while technical signals make more sense for short-term trades. 

Learn More

By now, you know how fundamental and technical analysis work along with their advantages, pitfalls, and situations when you can combine them for a balanced investment approach. While neither analysis type nor combined analysis can guarantee absolute success, constant learning and taking time to gain experience can transform you into a seasoned investor.    

Next, we will learn more about trading essentials, strategies, and systems, especially charting, technical indicators, different types of markets, and more.