Techno-fundamental Analysis
Hybrid approach to market analysis. Combination of both Technical Analysis and Fundamental Analysis. In both analysis there are some draw-backs, techno-fundamental analysis helps us eliminate the draw-backs.
Fundamental Analysis
Everything is fundamental. What do we mean by fundamental? Basic? or building block? Now, in world of future trading both are applicable and descriptive.
Supply and Demand
Supply and demand that derives the price of any product. That’s what I learned in my college years. Fundamentalists use historical economic information to establish a supply and demand price analysis. Then they relate, estimate the year,s demand and supply to the historical prices to decide if the current price is too high, too low or just right. The exact fundamentals studied depend on the market being analysed.
Forecasting demand and supply of the product determine the price of products. Mostly commodities are supply driven markets and demand remains constant. To arrive at an estimate of current supply statistics of any commodity the fundamentalist will examine reports of the number of acres planted with a particular crop. The fundamentalist also look at the expenses for the product, price of fertilizer, diesel price and prediction of weather.
The share prices are also dependable on prices of raw material and future demand of the company’s product. Fundamentalist determine the future profitability of the company on the basis of past data and prices.
Economic changes
Fundamentalists study the causes of price increases and price decreases in the hope that they will be able to ascertain changes prior to their occurrence.
In recent years globalization of markets has complicated the task of fundamental analysis. Economic trends, patterns and changes in Asia, America or Europe do have a significant impact on price trends in the India and vice versa.
Political stability and government economic decisions have major impact on the stock market. Government changes bank interest rate to control inflation, IIP data and inflation data also plays major role to drive all the markets.
Draw-backs of Fundamental Analysis
- All fundamental can not be known at same time.
- The importance of different fundamentals changes at different times.
- Fundamental analysis fail to answer the important question of speculator – Timing.
- Many fundamental data available after the fact.
- Many fundamental changes take place immediately with change in weather, political status, international events and government policies.
Technical Analysis
Charts are extremely popular and you must have seen them in the newspaper, on the television and on computer. Technical Analysts (chartists) study the historical and current data of price, volume and open interest of markets and derives the chart patterns, inter-relations, permutations and combination.
The goal of most technical analysis is not necessarily prediction, they only determine the specific entry and exit levels. In fact, they specify timing for buy or sell. They actually never predict the price but to follow the trend.
Perhaps an example of how a decision might be made using both approaches will help clarify the differences. in mid-2005, the price of Adlab Films Ltd. begun to move higher. It was Rs. 120. Seemingly, without warning the price jumped sharply and continued higher for many months. Although the average trader was unaware of the reasons for the move when it first started, in fact the merge news of Adlab films with Reliance Groups severely demand the stock by insiders and by those who had the news.
Technical trader who did not know the news but who saw their chart patterns changes from negative to positive also bought the stocks but not because they know the news. Until the market had made a large move up that average trader learned of the news. Both could have made money, if the follow their trading signal.
Modern days of computers have made the technical analysis easy and faster. As a result, there are literally hundreds of trading methods and techniques based on technical analysis.
Draw-back of Technical Analysis
- Pure technical analysis ignores all inputs news, weather and fundamentals.
- Computer technical analysis are used so widely that many systems act in unison, thereby affecting prices in a fashion that is not true price structure.
- Technical analysis fails to determine the targeted prices as it do not take economic conditions into consideration.
- Different technical indicators derives different results.
- Technical analysis is not a valid scientific approach because most methods study prices based upon price related data.
Techno-fundamental analysis combines both the analysis and attempt to eliminate the possible above listed draw backs of fundamental analysis and technical analysis.
Fundamental analysis is on priority once you adopt this method. First, find out the stocks that fundamentally good to buy and wait for the correcting the price to the level that technical analysis also suggest to buy the stock. After you take position in the market, you have to follow with the price with stops, that can be also derived by technical analysis. With the up movement of price of stock, you have to lift the level of stops also and in case stock falls to your stop level, you have to sell the stock.
Techno-fundamental analysis is one of the best method to make money in stock market as it . Going long is advisable with this method. Once you select the stocks that are fundamentally good, you have to wait till the technical analysis supports your stock. Sometimes, you have to wait longer without investing but immediate results start. On losing situation with Techno-fundamental Analysis.
How does the Techo-fundamental Analysis works?
Select the stocks, especially when market is slack and check out your selected stocks’ fundamental.
Wait for the stocks’ technical correction, when you get buy signal on technical analysis buy that stock.
Keep the stop-loss, in case the technically the stock revert. And exit the market if market revert.
Sometimes, after selecting the stock you have to wait longer for technical correction holding your cash.
If your stock is winning situation, you have to trail stop-loss. Do not exit the market without taking maximum gain, because you have to re-enter again looking new fundamentals and technical analysis.
Same method can be used to short the stock futures, but stocks slide faster before you trade.
Good luck & safe investing.
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Related Reading:
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