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Trader Q&A: Can Technical Analysis and Fundamental Analysis Coexist?

Schwab trading specialists discuss how fundamental and technical analysis can complement each other.

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Kevin Horner: Absolutely. Absolutely. I think the long and short of that is that fundamental analysis is your first step, tells you the stocks you want to consider perhaps, the stocks to buy if you are looking to be bullish. And then the technical aspect is really the when to consider the entry point I think. I do think they not only coexist but they complement one another when used appropriately.

Lou Mercer: Yeah. I always use the pie theory and when Thanksgiving comes around, my grandma she makes a really good apple pie. And I always take this little slice of that apple pie and I hide it and that's what I would use as my trading side of my account. So for that I'm using more of the technical analysis, not as much of the fundamental analysis. Now the rest of the pie, the one that I'm going to share with everyone else, that is that longer term plan, stay the course. And you might look at more of the fundamentals on that side as opposed to the technicals. But yeah. They can coexist. What I don't want people to do though is to try to time their longer term or that bigger piece of the pie there.

Kevin Horner: Right. Right.

Lou Mercer: Try not to time that longer term. If you want to slightly go overweight equities or stocks or slightly overweight or underweight bonds and cash, great. Go for it. But do not make these all in, all out type decisions. If you want to do that then you should be hiding a piece of that pie for yourself for later and do your trading there.

Kevin Horner: I totally agree and I also think it's important to consider even from a trading standpoint. It's ok to use fundamental analysis to consider the stocks that you want to trade even on a short-term basis because it should give you more comfort and consistency of success I would suggest. Even in the short run a good difficult stock can move higher. Well in the short run a very well rated stock can move very well for you in a short period of time as well but it also might give you that confidence to maybe stay with it a little longer, give it some more breathing room, take a smaller position and wait for it to prove itself out and then add to that position. So you can absolutely combine them and use them jointly.

Lou Mercer: Yeah. On my trading portion of my portfolio I will screen for stocks looking for what we call the Schwab equity ratings just like a school grade As, Bs or Cs. I'll avoid the D and F rated stocks. I start in the industry in the mid-'90s. I don't trust traditional analysts. I believe stock prices go up and then analysts raise their opinion. Stock prices go down and then analysts lower their opinion. Schwab said there has to be a better way and we came up with the Schwab equity ratings. The idea isn't to target when the market is going up or when its going down.

What we're trying to look at fundamental, valuation, momentum and risk to help you with which stocks to own in each sector. So that's how I'll incorporate fundamentals in my shorter term trading by simply screening for stocks that aren't those lower rated ones. Doesn't mean those lower rated ones can't go up. It just means we believe there are better opportunities in those sectors.

Lee Bohl: Right. Even for short term trading I also use that screen for the SER, Schwab Equity Rating, all it says is it never hurts to fish in a well stocked fundamental pond.

Kevin Horner: I like that one too.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Examples are not intended to be reflective of results you can expect to achieve.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Past performance is no indication (or "guarantee") of future results.

Schwab does not recommend the use of technical analysis as a sole means of investment research.


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