Can traders use technical analysis instead of fundamental analysis? While there may not be a definitive answer, it is worth mentioning that investors will be more conversant with the markets by merging technical and fundamental analysis. They will also be able to measure the direction their investments could be headed.
Read on to understand the things an investor should consider when applying both strategies from the market perspective. The article also covers the drawbacks of combining technical and fundamental analysis.
Technical Analysis Methods that Merge Effectively with Fundamental Analysis
Here are some of the technical analysis methods that investors can leverage to acquire detailed information.
· Volume Trends
When investors or analysts are researching a stock, they should seek guidance from other investors. A popular strategy for assessing market sentiment is to evaluate newly traded volume. Massive spikes are an indication that the stock has attracted more attention from traders and investors, and that shares are either under distribution or accumulation.
Many traders use volume indicators because they enable them to determine whether other investors approve of their outlook on a security. Many traders, leverage volume expansion as a recognized trend acquires momentum. A sudden drop in volume can indicate that traders are disinterested and an imminent reversal.
Day trading charting is becoming more popular because it allows traders to monitor volume spikes which usually coincide with block trades. The approach can be effective in determining when big institutions are trading.
· Monitoring Short-Term Movements
Many fundamental investors often focus on the long term, but they also want to acquire a good sell and buy price after position liquidation. Technical analysis can come in handy during such situations. Once a stock surpasses its 21 or 15-day moving average, it flows through that trend for a limited time, signaling what traders should expect in the oncoming term.
Some fundamental investors and chartists often leverage 200 and 50-day moving averages to identify prolonged breakout patterns. Traders seeking to either reinforce a relevant exit or entry price or time trade in a particular stock can benefit from combining technical and fundamental analysis strategies.
· Observing Sentiment Over Time
Numerous fundamental analysts analyze charts of a particular industry, stock, market, or index to determine the institution’s performance over time following the release of certain news like positive economic data or earnings.
Patterns often repeat themselves, and investors attracted or discouraged by the specific news may behave similarly over time. For instance, suppose an analyst evaluates the charts of different housing stocks. They are likely to find that they present negative sentiments whenever the Federal Reserve does not reduce interest rates.
Take a look at the reaction of home improvement retail stores whenever there is a drop in existing and new home sales. The sentiment is usually consistent every time. By assessing historical trends, traders and investors can predict the sentiment to a later event.
Drawbacks of Combining Fundamental and Technical Analysis
Technical analysis is likely to provide an incomplete or inaccurate stock outlook because of:
· It’s History
Traders can predict some movements according to patterns or when a specific stock passes over a critical moving average. However, charts can’t predict future negative or positive fundamental data because they only focus on the past. Still, if some good news break, many investors may want to leverage it to earn profits and the effects will be evident on the chart. Investors cannot get critical long-term fundamental data like the future course of earnings per share or cash flow from a simple chart.
· Sometimes the Crowd Could Be Wrong
Traders should ensure the stock they buy into features an upside momentum. Still, it is worth noting that sometimes the crowd is wrong. Remember, it is not surprising for a stock that was collectively accumulated the previous week to be under massive distribution on subsequent weeks. Again, stocks that were heavily sold the previous week could be under accumulation in subsequent weeks.
· The Presence of Subjectivity
Some amount of subjectivity is necessary when reading a chart. After viewing a chart, some investors may notice a merger in the stock price, while others may conclude that more downside is necessary. Who among the two would be suitable? No calculation can provide a conclusive answer, just as it is with fundamental analysis. In charting, only time can predict the direction the markets will take.
Technical analysis is a critical tool, but traders should understand its pros and cons before using it. There is no conclusive answer to whether traders should use technical analysis as a substitute of fundamental analysis. However, many traders are confident that it is effective when used to complement various investing strategies.