How to use both technical and fundamental analysis in your trading

How to use both technical and fundamental analysis in your trading

While many participants may base investment and trading decisions on either technical or fundamental research, some combine both methodologies to form a more complete strategy. Rivkin Global has, since its inception, employed technical analysis successfully to identify trade opportunities and formulate specific trade set-ups. But in an effort to be even more efficient, we aim to combine the best elements of fundamental and technical analysis to form a relatively low risk trading system.

On their own, fundamental and technical analysis have many advantages and disadvantages. Fundamental analysis can be ambiguous and time consuming to undertake, while technical analysis can be misinterpreted and overanalysed. However, fundamental analysis can identify emerging market trends, identify undervalued and overvalued securities, and conduct comparable analysis. Technical analysis is efficient, transferable, and can be used as a confirmation tool to identify low risk trade set-ups. So it makes sense to try and combine the advantages of both methodologies.

By combining these particular elements, a systematic and risk sensitive approach to trading can be taken. For example, a trade entered on fundamental reasoning could be protected by a stop loss placed below a crucial support zone. However, even after the GFC and an extended period of stagnating portfolio performance, traditional managed funds still fail to use stop losses and capital protection techniques. Rather, they typically protect capital through ‘diversification’ and capital allocation techniques stemming from fundamental analysis. The strategies used by Rivkin Global aim to avoid such pitfalls.

Hedge funds fared better than traditional managed funds throughout, and in the wake of, recent financial crises. They were able to cut losses short during the GFC, and put capital to work in alternative asset classes such as U.S. treasuries and precious metals. Meanwhile, managed funds that simply tried to mirror the ASX200 index rode the share market rollercoaster from its peak in 2007 to the depths of the GFC in 2009. The only major alternative for these funds was to jump into cash, as they couldn’t directly access alternative asset classes such as commodities or currencies. And importantly, they couldn’t make money from falling asset prices.

One of the great advantages of technical analysis is its compatibility with capital protection methods. For instance, by using technical elements such as historic price volatility, trend lines, trend channels, and support and resistance levels, Rivkin Global analysts can accurately place stop losses at levels of least risk, while retaining the potential for great reward. And they can fundamentally analyse economic, industry, and company information to identify emerging trends and form a directional bias, while using technical analysis as a confirmation tool.

Rivkin Global firstly looks to assess broader fundamental factors such as macro-economic shifts and emerging fundamental trends in sectors and stocks, which can help form a directional bias of a particular market, sector, stock, currency or commodity. Once a directional bias has been established, we use technical factors to identify trade set-ups and formulate position size; i.e. we figure out how to enter and exit the trade.

A common way of fundamentally looking at global markets is by working from the top down. This works by identifying emerging political, economic, social, technological, environmental, and judicial themes. Once a theme or trend has been identified, sector and company level type analysis can be conducted. A simple example of this methodology could be identifying a rebound in the U.S. housing market, and finding sectors and stocks that would benefit from this.

At a company specific level, when technical trade set-ups emerge in two or more companies with similar business models, the use of fundamental analysis can help determine which company to trade. In this instance, a comparative analysis of the companies’ underlying fundamentals can be used to highlight the company with the most upside potential. For instance, if two companies had identical technicals, the solution could be to choose the company with a superior balance sheet, earnings history, margin growth, and management track record.

In a world where high speed, mechanical, and computer driven trading systems are becoming the norm, discretionary trading strategies still hold their own, as many successful hedge funds have recently proven. But as it’s highly difficult for investors to invest money in hedge funds, due to tough rules and regulations, many investors are unable to get access to sophisticated trading strategies. However, through Rivkin Global’s simple, insightful and highly profitable trading advice, anyone can now gain exposure to successful hedge-fund-style long/short trading strategies.

To find out more about Rivkin Global and its trading strategies that aim to profit from global markets, regardless of market sentiment, volatility and direction, please call 1300 748 546.

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DISCLAIMER: Rivkin aims to provide clear and simple information to those visiting our website. If any part of this disclaimer does not make sense, please phone Rivkin and ask to speak with a member of our Dealing and Relationship Management Team. Rivkin provides general advice and dealing services on securities, derivatives and superannuation (SMSF). Rivkin also provide SMSF administration and accounting services. Rivkin does not provide advice that takes into account your, or anybody else's, investment objectives, financial situation or needs. We strongly suggest that you consult an independent, licenced financial advisor before acting upon any information contained on this website. Investing in and trading securities (such as shares listed on the ASX) and/or derivatives (such as Contracts for Difference or 'CFDs') carry financial risks. CFDs carry with them various additional risks that differ from more simple securities such as fully-paid company shares. Some of these risks include not owning the underlying instrument from which a price is being derived, settling trades 'over the counter' with a financial institution rather than on a stock exchange, and using leverage to gain access to trades that may have a higher face value than your initial deposit. This risk of leverage means that it is possible to lose more than your initial investment. Our aim is to create more life choices for our clients, which means improving the wealth of clients throughout many market cycles by nurturing a relationship spanning many years. If you are not comfortable with your understanding of the risks involved before using a Rivkin product and service, please contact our office to seek further information or a Product Disclosure Statement, or make an appointment to sit with one of our friendly financial experts. It is in our interest for your Rivkin experience to be a rewarding and comfortable one. Rivkin is a trading name of Rivkin Securities ABN 87123290602, which holds Australian Financial Services Licence No. 332 802.