I cannot count the number of books I have read on this topic, nor the number of times I have been part of a debate on this particular aspect of investing.
Is there a Relationship between Technical and Fundamental Value of a Share?
Short answer – NO.
While technical analysis relies on a study of human behavior, fundamental analysis relies on a company’s financial statements and other qualitative factors. While a stock may be “screaming buy” based on its long term fundamentals but may best be avoided as per a technician based on an imperfect or week chart pattern. On the other hand, often you find stocks of companies with bad managements or poor fundamentals being recommended by technicians for a short term momentum trade.
There is no correlation between the 2 styles of investing other than the fact that the intention in both cases is to earn a profit.
Technical vs. Fundamentals – Should you look at both aspects of a stock?
Short Answer – Why not but may be not.
A slightly more rationale view on this – When investing based on fundamentals, one may look at technical aspects. When investing based on technicals, fundamentals do not matter.
If I were to give an answer with a subset analogy of mathematics – “all technicals could be an inclusive part of fundamental views”.
Based on such an analogy, I think the rules to follow are clear:
For Fundamental Investors:
- You may take cues from what a technician says;
- If you have a list of fundamentally strong stocks which in your opinion offer value at their current price, a technical analyst may well be a good resource to give you an entry signal;
- Never look at technicals yourself – you have limited time, leave this to someone who spends days and hours doing only one thing – reading charts.
For Technical Traders:
- Be emotionally zero and work on your psychological traits.
- Have nothing to do with fundamentals – while this may sound silly but being unaware of everything that happens around you is at the very root of technical analysis.
- Study human not corporate behavior – human behavior as displayed on a chart pattern has absolutely nothing to do with long term planning of companies.
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