A crystal ball that instantly and accurately evaluates stocks? An investor can dream. For now, we’ve got a myriad of analysis methods. Fundamental analysis and technical analysis are two of them.
Both methods take a very different approach to evaluating how investment-worthy a stock might be, and each makes sense for different scenarios and different goals.
That said, different doesn’t mean opposed. In fact, combining fundamental and technical analysis can help improve the outcomes of your investment decisions, once you know how to do it.
How fundamental analysis and technical analysis differ
Before you can combine fundamental and technical analysis, you need to understand what they are, what they do best, and what they don’t do.
Fundamental analysis: what to buy
Fundamental analysis looks past the stock chart and digs into the company — its performance, potential, and true value — to figure out whether a stock seems like a good deal or not.
Using fundamental analysis can help you decide when to buy, by answering questions like:
Is the company financially healthy?
Is the company growing?
Is the company undervalued, overvalued, or fairly valued relative to its potential?
It’s a great way to discover companies with high-potential, undervalued stocks, which is useful for investors with a long-term investing strategy. If you can buy early and low, you can sell later and (hopefully) high.
On the flip side, fundamental analysis is not the best valuation method when you’re looking to make quick, short-term moves. The insights it provides are based on a longer view, not the current day-to-day price swings.
Technical analysis: when to buy
Technical analysis focuses on the stock’s behaviour. It looks at price trends, chart patterns, and trading volume to understand what investors are doing in real time and why.
Using technical analysis can help you decide when to buy or sell, by answering questions such as:
Is the price likely to keep rising or falling?
Is the current movement strong, or is it about to lose steam?
Are other investors acting with excitement or trepidation?
Technical analysis is a great tool for investors looking to make quick moves. Using both historical data and current market insights, it can help you better predict how a stock might move so you can jump on trading opportunities.
While it can be useful for timing trades, technical analysis is not the best approach for deciding whether a business will still be strong five years from now. Stock charts can’t prove innovation, leadership, or long-term financial health.
The advantages of combining technical and fundamental analysis
Fundamental and technical analysis integration essentially gives investors the best of both worlds. When you combine the approaches, you compensate for each approach’s weaknesses and get a more balanced view of a stock that takes into account its short- and long-term potential, plus:
The confidence of good fundamentals. Fundamental analysis helps investors gauge the investment-worthiness of a company, based on the company’s holistic well-being and performance. If integrated analysis turns up encouraging results, then you can feel more confident about the business fundamentals behind the stock.
Disciplined timing. Fundamental analysis can’t tell you when to pull the buy or sell trigger, but technical analysis can. Confidently deciding to move forward with a trade is one thing, but knowing when to enter based on when the price is more likely to move in your favour can help you reduce risk and improve your potential returns.
Value-trap risk mitigation. Sometimes stocks that appear undervalued are undervalued for a good reason. If a value-hunting investor overlooks that reason and proceeds with investing, he or she could be left with a loss. Applying elements of technical analysis can help investors better avoid value traps.
Hype avoidance. Investing can be an emotional roller coaster. Big market moves can create FOMO, especially for very active investors who like to make quick trades. Fundamental analysis forces investors to look at the bigger picture and longer term, which can help them avoid rash, emotion-based moves.
The confluence concept
Combining technical and fundamental analysis can offer another major perk: confluence.
Confluence is an investing term for when multiple valuation signals all point in the same direction, providing strong support for trade decisions. The more signals that align, the more confident you can be that you’re making a well-supported choice.
Here’s a simple example:
Let’s say your fundamental analysis uncovers a company with:
Strong earnings growth
A competitive advantage that looks long-lasting
Effective leadership
A stock price that seems undervalued based on the above factors and compared to industry peers
Those factors check the box for long-term quality. But is the timing right? Your technical analysis might show:
The price finally starting to turn upward after a period of prolonged decline
The stock rising above a price level it previously couldn’t get past
More investors buying the stock (an increase in trading volume)
Now you have two things working in your favour: a fundamentally solid company and positive momentum in the price. By choosing to make a move only after you’ve confirmed that investor demand is there, your decision is that much more strategic. That’s confluence in practice.
How to use fundamental and technical analysis together
There are tactics you can use to combine fundamental and technical analysis in a way that streamlines your evaluation and keeps you focused on the right insights.
Use technical analysis for better entry points
As the example in the last section illustrates, technical analysis can be used to help you zero in on the best time to enter a trade. Even if a company is super strong, entering at the wrong time can leave you anxiously watching numbers for months.
Technical analysis offers a few common indicators that you can use to time your fundamentally sound investment picks:
Support and resistance. These are price zones where investors have historically started buying or selling in noticeable amounts. Think of support as the floor, where the price tends to stop falling and begins to rebound, and resistance as the ceiling, where the price often reaches a limit and starts to fall. They help you understand where a stock’s price tends to bounce or stall, which can indicate a favourable entry point.
Moving averages. This is a calculation of a stock’s closing prices, averaged over a set time period. It essentially smooths out day-to-day price movement to help you more clearly identify and confirm trends. A rising price signals a good time to enter.
Volume. Think of it as a way to measure the enthusiasm (or lack thereof) of the market. When volume is high, it means lots of traders are getting involved, which can help you confirm that a price move is real and not just a small blip. When volume is low, fewer investors seem convinced. You typically want to time your trades to when volume is on the rise.
Strengthen risk management with technical tools
Risk management isn’t as exciting as strategic timing, but it’s key to high-performing portfolios. Using technical analysis tools in conjunction with your fundamental analysis can help you create a risk management strategy that better protects you from downside and limits your exposure to volatility. Examples include:
Using stop-loss orders at strategic levels. A stop-loss is an automatic sell order if a stock price drops too far. By placing stop-loss orders at key support levels (remember: these are the “floors” from which prices have historically bounced up), you can protect yourself from major price drops. If the stock breaks through the support level, you’ll get out before a small loss becomes a big one.
Adjusting how much you buy based on how much the stock normally moves. The average true range (ATR) measures how much a stock typically moves in a day (its normal volatility). If a stock tends to swing a lot, you can take a smaller position so those swings don’t turn into big losses. ATR helps you decide “How much should I buy?” in a way that keeps your overall risk in check.
Using trailing stops to lock in gains. A trailing stop is like a stop-loss that automatically moves up as the stock price rises. It “trails” behind the price with a set distance (such as 5%, or a set number of dollars). If the price reverses, the trailing stop sells for you, protecting your profits without forcing you to guess the perfect time to sell. It lets you ride a trend to capture gains, but also gives you a built-in exit strategy if the stock reverses.
Using sector rotation signals to manage exposure. Sector rotation refers to money that flows from one part of the market to another as sectors get stronger or weaker and trends shift. Technical analysis can help you spot these shifts via sector rotation patterns. That way you can adjust your portfolio to maintain exposure to sectors that are strong, while reducing exposure to sectors that are lagging behind.
Use confirmation signals
Think of fundamental analysis and technical analysis like working with two trusted advisors at different banks, or like getting a second opinion from another doctor.
If they both come to the same conclusion, that’s strong validation. If they disagree, you need to pause and investigate further.
You can use confirmation signals from both fundamental analysis and technical analysis — green lights and yellow/red lights — to make decisions about whether to move forward or reassess.
Green lights (confluence, or when everything aligns)
The company’s financial performance is strong, and the stock price is finally breaking above a level it struggled to pass before. These are signs that demand is growing, and not because of hype.
The company’s sales are increasing, and the number of people buying the stock is going up, too. Rising revenue shows business strength, while higher trading volume signals that investors are gaining interest and confidence.
The stock’s price is starting to climb again at the same time the company’s fundamentals are improving. When the business outlook gets better and the market reacts positively, it shows that price recovery is backed by real progress.
Yellow/red lights (divergence, or when something doesn’t add up)
Is the company fundamentally great, but the stock price keeps dropping? The market might know something that you’re not seeing.
Is the stock price showing major growth, but the company lacks strong fundamentals? The hype might be short-lived.
Are the company’s fundamentals getting worse, but the stock price hasn’t changed yet? The market likely hasn’t caught on yet, but a drop might be just around the corner.
A simple framework for combining the methods
There’s no one “correct” way to blend fundamental and technical analysis. But this straightforward framework can help you put the hybrid approach into action, without overcomplicating things.
Start with fundamentals
Use your fundamental analysis tools to assess whether the company is worth owning for the long term.
Look for things like steady revenue growth, strong earnings, a competitive advantage, and a reasonable valuation. If the business doesn’t look solid, you don’t need to go any further.
This step filters out the hype and focuses you on quality.
Check the chart for timing
If the fundamentals check out, then you can start applying elements of technical analysis to figure out whether or not it’s a smart time to enter.
You’re looking for simple technical clues like:
The stock price trending upward
The stock bouncing off a support level
The stock breaking above a price zone it couldn’t pass before
Increased trading volume
This step prevents you from buying too early, when the price could still fall.
Set your risk rules right away
Before you move forward, make a plan to protect your money.
How much will you invest, based on ATR and your risk tolerance?
Where will you place your stop-loss?
This step prepares you in case the stock price turns against you.
Monitor both sides as conditions change
Markets move fast, and technical and fundamental information can change at different speeds:
Stock charts update daily, or even more frequently.
Company fundamentals shift more slowly, but with more impact.
If things change in either area, it can affect your analyses. This step keeps you on the lookout for early signs that company performance or investor behaviour is shifting.
Adjust when the evidence changes
If the company fundamentals get weaker or the technicals break down, don’t ignore it. You want to act based on data, not headlines. That’s the whole point of these analysis approaches.
Acting might mean:
Exiting early to protect your money
Reducing your position to lower your risk
Taking your profit and exiting when the trend starts to lose steam
Reevaluating if the company’s story changes
This step helps you focus on the bigger picture of your portfolio.
Pitfalls to avoid
Getting stuck in ‘analysis paralysis’
Waiting for every signal to be perfectly aligned can hold you back forever. Look for reasonable alignment and remember that no trade is guaranteed.
Skipping risk management because the fundamentals look great
Even strong companies can have bad days. Always make stop-losses and position-sizing a part of your strategy so that one wrong move doesn’t derail your progress.
Letting one approach completely overpower the other
Fundamental analysis helps you choose what to invest in. Technical analysis helps you decide when. If you ignore either side, you lose the balance that makes this hybrid strategy work. Neither fundamental analysis nor technical analysis can guarantee investing success, but combining these two approaches can help you better stack the odds in your favour. By giving yourself both a solid long-term foundation and a more strategic short-term plan, you can invest with more confidence and less guesswork. But remember that neither approach is a one-and-done assessment: Continue checking in as conditions change, and be willing to adjust.
