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Fundamental versus technical analysis

Lesley Beath  |  22 Jun 2010Text size  Decrease  Increase  |  

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For many, fundamental and technical analyses are to be used in isolation. Many fundamental analysts believe technical analysis offers no added value in the investment process - the opposite often applies to the technical analyst.

But you can marry the two - and this can give the investor an added advantage.

While many fundamental investors focus on a longer-term outlook, chances are they still want to obtain an optimal entry level, or a favourable exit level. Technical analysis can help in this regard.

There will be times when human emotions push a particular financial instrument to levels of over or undervaluation. When this occurs, the technical situation will give some guidance as to when prices may revert to the mean. Additionally, there will be times when the price action of a particular stock appears to be in contrast to its underlying value. In this instance, the market may be giving advance warning that all is not quite as it appears to the fundamental analyst.

There are also situations, as was evident in 2008 and early 2009, where fundamentals were overridden by human reaction. The technical analyst always keeps a keen eye on the psychological aspects of the market. Psychology plays an important role in any analysis. Markets ebb and flow, the fundamental factors affecting financial instruments change from day to day, but the one thing that does not change over time is the human reaction to events. Fear, greed and indecision are the human emotions that are reflected in the price of any financial instrument - this array of emotions is what forms certain chart patterns. And this emotion is something that is not captured in the fundamental outlook.

There is an argument for combining the fundamentals and the technicals. This can give the investor the benefit of both disciplines, creating a powerful investment strategy.

For a more detailed look at technical analysis, click here.