Combining Fundamental and Technical Analysis in Stock Trading

A lot of traders typically fall into either one of two camps: fundamental or technical.

Fundamental analysis looks at economic / financial data and news - at either the company level, overall economy, or both. For example, they might look at the company's cash flow, price-earnings ratio, or the impact of news (i.e. Forbes recommended Canadian National Railroad because they have exclusive rail access to the new container terminal at the Port of Prince Rupert in British Columbia. This terminal should capture more freight traffic to Asia because it is 10 days from Shanghai vs. 12 days from the Port of Los Angeles.)

The advantage of fundamental analysis is that it can help traders avoid trendless stocks in favor of those about to move significantly. The disadvantage is that fundamental analysis does not give precise buy and sell points, so it is hard to develop a testable, repeatable system. A lot of fundamental investors use buy and hold.

Technical analysis uses charts, indicators, and formulas based on stock price and/or trading volume. Pure technicians believe that studying fundamental data is not necessary because the market's reactions to it get reflected into the stock.

The advantage of technical analysis is that it gives precise buy and sell signals, that can be incorporated into a testable and repeatable system. The disadvantage is that market noise can cause traders to over-trade and get whipsawed (i.e. buy high and sell low for small losses) until the markets make a substantial move.

In my case, I use fundamental analysis (from sources such as Forbes) to add stocks to my portfolio, and then use my Stock Trading Riches formula system to make buy and sell decisions.

This way, I get the best of both worlds and have a double edge. Over time, using fundamental analysis for selecting stocks gets my portfolio invested in stocks that are stronger than the general market. Over time, using my formula system self-corrects my initial buy points in each stock, and I buy low and sell high based on the stock's actual performance.