Fundamental Analysis and Technical Analysis – When to apply?

Fundamental Analysis vs Technical Analysis

Fundamental Analysis and Technical Analysis have been in the market for the longest time. Although both approaches are completely different, their goal are the same. Both Fundamental Analysis and Technical Analysis are used to determine the direction stock prices are likely to move. Do you know what is the difference between them?

Through Fundamental Analysis we study factors affecting the price of the stock in order to determine its intrinsic value. Intrinsic value is the actual price or value of a company after considering related economic and financial factors, in other words, what the company is worth of. There are many methods to determine the intrinsic value of a company and the few famous ones are the Discounted Cash Flow Analysis, Price Earning Ratio, and the Enterprise Multiple which we will get to them in the next few topics.

Other the other hand, Technical Analysis concentrates on the study of market action through the application of technical tools such as Charts, Price Patterns, Trends Lines, and all sort of other Indicators. The study of market action involves the study of human psychology and these tools are used to reveal the bullish and bearish psychology of the market. There is a saying history always repeats itself, if these tools have worked well in the past it is assumed that they will continue to work well in the future as human psychology does not tend to change.

None of the approach is better than the other as each approach has its own advantages and limitations. Based on my experience, it is best if you are good in both approaches because in reality there is a lot of overlap required in your investment. Let me share with you briefly the way I invest using Fundamental Analysis and Technical Analysis.

Fundamental Analysis

The greatest catalyst for a share price to go higher is its earnings prospect. When a company is making more profit every quarter or every year, its share price will go higher because the company is now worth more than it was previously due to its capability of making more money. In order for a company to keep growing and making more profit, its company’s financial condition has to be strong and healthy. By using Fundamental Analysis, I will be able to evaluate the company’s financial position, its cash flow status and etc to make sure the companies that I invest are fundamentally sound which meet my Fundamental Analysis criteria.

Technical Analysis

If the stock fulfill my Fundamental Analysis criteria, I will then apply Technical Analysis to determine my purchase entry price and buy into the stock by batches. Always make sure your entry point is right because no matter how good a company is, if you got it at a bad price you might not obtain the final result that you aim for. To further minimize your risk, separate your fund into few batches and enter at prices near support and resistance points. Entry point and support & resistance are can be located through Technical Analysis.

Pick stocks using Fundamental Analysis and Technical Analysis

Always remember to be flexible in your investment approach. Most of the time I will use Fundamental Analysis to pick potential stocks before I move to Technical Analysis. This is to ensure that I only invest in good fundamental companies. There are times where I will apply Technical Analysis to pick stocks too. I usually spend 3 days days in a week just to go through stock charts hoping to discover chart patterns that I like. Subsequently, I will apply Fundamental Analysis to determine if the company is worth to invest or not.

It is highly recommended that you get familiarized with both Fundamental Analysis and Technical Analysis in order for you to maximize your investment returns and minimize investment risks.

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