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Trading Up-Close: Technical vs. Fundamental Analysis

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While fundamental analysis can help you decide WHAT to own, technical analysis may help you know WHEN to buy or sell.

These two approaches offer distinct strategies, and traders usually align with one or the other. But they are actually complementary, and using them in combination gives a more complete understanding of markets and their direction.

If you are generally a fundamental analyst, consider that technical analysis could help you identify favorable times to enter a new trade or exit an existing position in the short term.

Because many traders believe the trend is our friend, watching a stock’s price fall through its 50-day moving average, for example, could suggest that the former bullish trend may, in fact, be broken. You can use longer moving averages to help determine breakout patterns over longer timelines.

Fundamental analysts may also benefit from another tool used by many technical analysts—volume trends.

When you track volume indicators, you may be able to get a picture of how other traders in general see the stock you are following. Again, it’s all about the trend. A gain in volume indicates increasing momentum, while a drop in volume can indicate that traders are moving away, and you could soon see a reversal.

Using fundamental analysis alone, it could take months for negative information to come to light, but incorporating technical analysis can help you quickly get a sense of where the stock is going.

Technical analysts can look at a chart and decide to buy a stock based on volume, based on momentum and price action. But you can be misled when it comes to price action by a company with poor fundamentals.

Having some idea of a company’s health can help a technical trader develop a solid foundation on which to build a trade. While it doesn’t guarantee success, having another layer of information based on Price to Earnings, or Debt to Equity, or other data, can add confidence to your technical viewpoint and offer another check mark in your pre-trade checklist.

While technical analysis is generally used by short-term traders, fundamentals are often used by long-term investors because market and economic cycles can be very long.

If the prevailing long-term trend is bullish, the short-term trader may have an opportunity to join this long-term trend during periods of short-term weakness, as price retreats to its long-term trend line or support.

Important Disclosures

This video is made available for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned may not be suitable for everyone.

The strategies and types of analysis discussed, and past performance, do not guarantee profitable results.


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