In financial markets, traders use either technical analysis or fundamental analysis when purchasing a security. For a trader to utilize both schools of thought is uncommon; traders are either not well versed in the analysis methods or unable to do so due to time constraints. However, if a trader is able to master both technical analysis and fundamental analysis, risk can be minimized while profits be maximized. First, let’s get into the details on the difference of each of the methods of analysis.
At it’s roots, fundamental analysis approaches a security by reviewing a company’s financial statements. By looking at the company’s balance sheet, income statement, cash flow, and retained earnings, a financial analyst will attempt give a company a valuation. Fundamental analysts often use financial ratios such as earnings per share(EPS), Price/Earnings ratio(P/E), and Profit Margin to provide insight on the company. In this approach of analysis, a company makes a good investment when the intrinsic value of the company is higher than the extrinsic value.
Unlike fundamental analysts, technical analysts find it unnecessary to review a company’s financial statements. Instead, technical analysts study the price movements in charts in order to predict its future price movements. Technical analysts believe that a company’s intrinsic value is already factored into the stock price.
Utilizing both analysis methods
Although many investors believe that the two traditional methods of analysis are complete opposites of each other, I believe that they both can co-exist in order to minimize risk and maximize profits. In my strategy, I first use fundamental analysis in order to determine a company’s intrinsic value. Then I utilize technical analysis to determine the best time to purchase the security. The main goal of investing is to buy low and sell high, so timing is extremely important. By utilizing both methods of analysis, I am able to purchase stocks in a strong company that is currently undervalued at the lowest possible price.