How can an effective investment strategy involving a combination of fundamental analysis and technical analysis be built in the analysis of stock markets or other investment assets priced in the capital markets?
On what premises, model assumptions can an effective investment strategy involving a combination of fundamental analysis and technical analysis in the analysis of stock markets or other investment assets priced in the capital markets be designed?
Some stock market investors, citizens and business entities, investment fund managers, investment banks operating in the capital markets use both technical analysis and fundamental analysis in their analysis and investment activities. The use of both of these analyses is usually based on the assumption that these two significantly different analyses can complement each other. Fundamental analysis consists of, among other things, several analytical segments on specific spheres of the economy, impact factors and risks acting on the operation of certain business entities, internal and external impact factors. In the environment of the company and the enterprise, the closer environment is analyzed, e.g. the competitive environment, relations with key competitors, with business counterparties, customers, with recipients of product and service offerings, with suppliers of raw materials, prefabricated components, subassemblies and other production factors necessary for business operations, with cooperators, with financial counterparties, lenders, etc. Strategic analysis, including, for example, SWOT analysis, marketing analysis, technical-economic analysis, organization analysis, financial analysis, including ratio analysis based on financial indicators based on quantitative data contained in financial statements, also plays an important role in fundamental analysis.
Technical analysis, on the other hand, involves analyzing changes in the rates and trading volumes of securities, currencies or commodities. This analysis is concerned with studying and interpreting the shapes of charts to forecast future prices (rates) based on an analysis of past price formation. Unlike fundamental analysis of a company, which takes into account both information about the global, macroeconomic, regional and industry environment in which it operates, as well as reports announced by the company itself, in the case of technical analysis these are not taken into account in the investment decision-making process. All the information needed for technical analysis is read directly from charts showing the historical price changes of the security, currency or raw material under analysis. Technical analysis assumes that stock market phenomena precede economic phenomena in time, and that the market is a mechanism for discounting the future. Technical analysts prefer to analyze the trend of the market instead of statistical data. Technical analysis is based on three basic rules: 1. Changes in supply and demand on the stock market are reflected in stock prices, 2. Changes in stock prices are subject to trends that persist over a long period of time, 3. Processes occurring on the stock market are repeated.
In view of the above, combining both analyses, i.e. fundamental and technical analysis, can give a kind of analytical added value. Accordingly, some stock market investors use both fundamental and technical analysis.
In view of the above, I address the following question to the esteemed community of scientists and researchers:
On what premises, model assumptions, can an effective investment strategy be designed to combine fundamental analysis and technical analysis in the analysis of stock markets or other investment assets priced in the capital markets?
What do you think about this topic?
What is your opinion on this issue?
Please answer,
I invite everyone to join the discussion,
Thank you very much,
Warm regards,
Dariusz Prokopowicz
Dear researcher,
in addition to fundamental and technical analysis, i would like to draw your attention towards Sentiment Analysis, which is based on theories of behavioral finance.
As the sentiments have the strength to beat fundamental as well technical analysis, I would advocate for bottom up approach of analysis , where sentiments shall be validated by technical and fundamental strength of the stock.
An effective investment strategy that combines fundamental analysis and technical analysis may be based on the following assumptions:
It is important to note that these are model assumptions and there is no guarantee that combining fundamental and technical analysis will lead to better investment decisions. It is important for an investor to do their own research and make their own decisions based on their risk tolerance and investment goals.
Step 1: The fundamental analysis, in short, suggests that investment be made in a company with good competitive power functioning in a growth industry and doing business in a rising economy. (Selection)
Step 2: Finding the value of the security of the selected firm comes next, which should be done based on the present value of the expected forecasts and implicit business trends of the firm. (Valuation)
Step 3: Technical analysis helps in deciding the time when the transaction should be made. Some formations (like V or W) signal buying opportunities, while some formations (like M or H&S) signal selling imperatives. (Timing)
Doing transactions for profit-booking has a different strategy. However, an investor planning to hold a stock should conduct a qualitative analysis, by which he can assess the capability and future orientation of the management team that is dedicated to creating value for the shareholders.
The key word in this question here is "effective". Effective towards what? For examples:
- Towards ensuring for oneself sufficient investment income to supplement one's pension income in old age, or retirement?
- Towards ensuring that the effective market value of one's investments as time progresses on, i.e. over short, medium, long term ranges, is always showing a targeted increase in comparison to both original purchase cost of such investments, or even in line with inflation development as it evolves over set time spans?
- Towards ensuring for the (supply side) investment firms regular net operating profits?
- Towards both value and income comparability with similar investments in the particular industry/sector at some static point, or over a set time span?
- Towards providing positive DCF figures on a continuous basis from the set investment/s?
- Towards merely providing "some sort of" satisfaction/s to what are often referred to as "chartists"?
There are indeed many investment strategies that renowned investors (e.g. the famous Warren Buffett) have over time recommended and written about, and when one reads these personalities' books one is indeed often very impressed. But careful reading of such books, such periodic newsletters from touring firms will quickly reveal their caveats. For example the classic "caveat emptor", let the buyer beware. And this is mainky because investing is such a highly personal thing. No two investors ever ever fit into an identical mindset, personal financial situation, or, indeed, personal financial targets or aspirations.
There is no one fixed hard set solution to the question. It always depends on individual investors' needs/wishes.
Dr. John Consiglio
The University of Malta.
Will have lot's of strategies that could be using technical and fundamental analysis.
To not be too generic, fundamentally, you can look for companies that generate cash, this company probably will survive even in the worst scenarios.
Technically, you can look for trend indicators, that can show what the actual perspective for an asset.
I remember that this is not a suggestion of investment, I simply share my personal thoughts.
Deeply depends on what do you consider as investment, what do you consider as "good enough" returns. If you'd like to get average results - just do usual wellknown things, else - you have to develop own approach
All valuable suggestions! But, as I said, investment being basically an activity carried out by many humans, and for many humans, and ALL of these differing in one or many ways from each other, well then the golden rule is that there is no golden rule !
Dr John Consiglio
Technical analysis is essential to analyse patterns and trends of stock markets. However, to build an effective strategy for investment, both analyses are required to evaluate stocks’ intrinsic value and forecating future prices.
An effective investment strategy that combines fundamental and technical analysis can be built through a number of steps, including but not limited to understanding the market, evaluating the company's or market's financial health, looking at key indicators such as revenue, earnings, and growth potential, and building a diversified portfolio. Combining the two approaches can help investors get a complete picture of a stock or market and make more informed investment decisions. However, no investment strategy is guaranteed, and past performance does not guarantee future results.
An effective investment strategy that combines fundamental and technical analysis in the study of stock markets or other investment assets priced in the capital markets can be designed based on the following premises and model assumptions:
1. Market efficiency: It is assumed that the capital markets are at least partially efficient, meaning that the current price of a stock reflects all available information about the company and its financial health.
2. Long-term perspective: Both fundamental and technical analysis can be used to make short-term and long-term investment decisions. However, an effective investment strategy is likely to be based on a long-term perspective, as both fundamental and technical analysis is more accurate when looking at trends over a more extended period.
3. Valuation models: Fundamental analysis typically involves using valuation models such as the price-to-earnings ratio, the dividend discount model, or the discounted cash flow model to determine the intrinsic value of a stock. These models make certain assumptions about future growth, earnings, and dividends, which can impact the accuracy of the valuation.
4. Technical indicators: Technical analysis involves using technical indicators such as moving averages, Bollinger Bands, and the Relative Strength Index (RSI) to identify trends and make investment decisions. These indicators make certain assumptions about market behaviour, which can impact the accuracy of the signals they generate.
5. Diversification: An effective investment strategy will likely involve diversifying investments across different asset classes and industries to reduce overall risk.
6. Risk tolerance: An effective investment strategy should consider an individual’s risk tolerance and goals. For example, a more risk-averse investor may prefer a system that emphasises fundamental analysis, while a more risk-tolerant investor may prefer an approach that emphasises technical analysis.
It is important to note that these premises and model assumptions are not absolute and can be subject to change over time as market conditions change and new information becomes available. An effective investment strategy should be flexible and subject to regular review and adjustment.
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https://www.investopedia.com › ... › Fundamental Analysis
Fundamental analysis is a method of determining a stock's real or "fair market" value. Fundamental analysts search for stocks currently trading at prices higher ...
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Efficient Market Hypothesis (EMH): Definition and Critique
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How can you build an effective investment strategy involving a ...
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Technical analysis assumes that stock market phenomena precede economic phenomena in time, and that the market is a mechanism for discounting the future.
8 answers · 1 vote: Dear researcher, in addition to fundamental and technical analysis, i would like to draw ...
Technical Analysis of Stocks & Securities | CFA Institute
https://www.cfainstitute.org › refresher-readings › techn...
Technical analysis has three main principles and assumptions: (1) The market discounts everything, (2) prices move in trends and countertrends, and (3) price ...
Fundamental vs. Technical Analysis - AMG Funds
https://www.amgfunds.com › ... › Investment Essentials
Technical analysis and fundamental analysis are two main schools of thought when it comes to analyzing the financial markets. Technical analysis looks at ...
Missing: premises | Must include: premises
The Comparison of Two Analysis in Malaysia Stock Market
https://publisher.unimas.my › article › download
Keywords: Fundamental analysis, Technical analysis, Stock return, Trading strategy, Investors, Bursa. Malaysia. INTRODUCTION. A stock market is a virtual ...
2023 Long-Term Capital Market Assumptions
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It draws on quantitative and qualitative inputs as well as insights from experts across J.P. Morgan Asset Management. Our own multi-asset investment approach ...
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The efficacy of both technical and fundamental analysis is disputed by the efficient-market hypothesis, which states that stock market prices are ...
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31 Jan 2023 — Fama's investment theory – which carries essentially the same implication for investors as the Random Walk Theory – is based on a number of ...
Missing: premises combines
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22 May 2022 — Modern portfolio theory is an investing strategy. It focuses on minimizing market risk while maximizing returns. MPT uses diversification to ...
Use fundamental to develop a cluster of companies that fit certain financial strength measurements, and use technical to form entry/exit points.
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