The Merger – Applying Technical And Fundamental Analysis To Your Trading

I would have to say that if I were to break trading down into only two categories that most, if not all, of you out there reading would agree that these two categories would be technical and fundamental trading. Now I realize that each of these includes multiple forms of trading, including speculation, investment, cash flow, capital appreciation, and many others, but at the root, you are either a technical or a fundamental trader.

Regardless of which approach you have built your trading style and strategies on, it is possible, necessary even, to build on it and grow it. This may mean tackling highly advanced, cash producing, delta-neutral strategies that incorporate short, long, options and equities. Or it could mean moving outside of your comfort zone, learning the other side of the coin, and merging technical and fundamental trading together.

  • Technical analysis (TA) is often regarded as an applied social science. It is the study of mob mentality via financial markets based on past price patterns. A mob is a very primitive social organism that is often swayed by peer pressure, will repeat behavior, and is predictable. TA is used to predict future price movements and to use that knowledge for profits.

  • Fundamental analysis is the more substantive method of market analysis, whereas the technicals are more speculative.  Fundamentalists study economic trends, earnings expectations, and market valuations, and they then invest in companies that they perceive are undervalued based on current results, future expectations, or a combination of both.

My Eyes Opened

I am a technical trader. I learned technical analysis because it was easy. I could see price action in my head, the patterns were clear on the charts, and I didn't need to worry about the fundamentals, or so I thought. The basic premise that technical analysis assumes is what drew me to it. The primary tenet is that all things are known by the market, and if they aren't in the moment, they soon would be, and that knowledge is represented in the price action and chart patterns.

Another attraction was the tools. I could use moving averages, oscillators, histograms, Fibonnaccis, standard deviations, trend lines, and a little bit of artistic flair to trade without any concern for the news, earnings, economic trends or politics. I was basically right, and this worked for me and still does, except I reached a point where I began to become interested in the fundamentals, and then I began to notice how they affected market movement, and how that movement looked on the chart.

Suddenly my perspective was widened and I was able to see why sometimes the technical analysis worked and sometimes it didn't. The reason is because I was misreading signals and trading against the underlying trend. The thing about technical analysis that I was not paying attention to is that it is a cold mistress and many of the tools and signals are ambiguous without a fuller understanding of the market.

Ultimately the merger of fundamental and technical analysis is a natural fit. In essence, they are both sciences and, as such, complimentary to each other. If you think of the market as a living, breathing organism, then fundamental analysis is like a doctor doing an exam and technical analysis is the X-ray, C Scan or MRI the doctor uses to see what's going on inside the body. Another way to think about this is: as a technical trader, I like to have confirmation of indicators, and what better confirmation of technical trends is there than an underlying economic one to support it?

It's Not As Hard As You Think

I'm sure by now the techies are shrinking away from the thought of learning all those numbers, the fundamentalist from the thought of gambling on a chart. Let me assure you, this merger is not as hard as it may seem. Start simply, keep a journal, and you will slowly be able to bring the two disciplines into line with each other. I don't spend my days reading reports; all I do is keep up with the news and follow a few points of economic data.

I begin with US jobless claims. I track that report on a week to week basis, until I have an understanding of the trend, all the while slowly learning about other data points that tie into labor. I don't track the deep numbers that go into each data point, and I don't track things regionally. All I do is keep up with the weekly and monthly releases as they come out.

Each week when the data comes out I analyze it fundamentally, and then apply that knowledge to what I see in the charts. This may seem ironic, but it is possible to use your technical analysis on economic data. When the data is trending in a bullish manner, which in the case of jobless claims is down, and the market is trending up, those two trends confirm each other. When an unexpected jump in claims, or near term uptick in unemployment, or a one-off month of bad job creation cause a market sell-off, I can see it for what it is, a buying opportunity in a longer-term uptrend and not an impending correction, as the headlines and media may lead some to believe.


It's possible, necessary, and profitable to utilize both fundamental and technical analysis when you trade. If you don't believe me, just try to trade on one alone and you will soon see that there is something standing in the way of your profits. For me, it was a lack of attention to underlying trends. Underlying fundamental trends are what make the difference between a wedge pattern and a double top, between a continuation and a reversal. Once I realized that my profitability increased substantially and that is what trading is all about. Social trading is a fantastic method of getting your feet wet when trying to merge the gap between the two styles of trading. Join a forum, meet some other traders, and get some discussion going, and soon you will see the results. 


 Related Reading …

Expect Economic Boom In 2015

Buy The S&P 500 For Profits In 2015 

To learn more about Michael Hodges and social trading, please click here.