Investors have been traditionally categorised into 2 types - short-term and long-term. Short term investors are actually traders, looking to make quick gains on the market with the goal to create an additional source of income. Long-term investors are essentially wealth builders, looking for undervalued stocks to capitalise on long-term, fundamental market opportunities.

There is a third way, which combines both. But before that, let`s understand the first 2 investing approaches clearly.

Fundamental analysis is a way to evaluate the true value of a company`s stock or investment by looking at its long term and fundamental factors like financial health, prospects of the industry, business capability, quality of management, and valuations. It`s like buying a house – instead of just looking at the price, you would want to know the health, location, amenities, rent potential, and prospects for future growth. Fundamental analysis is like finding a great deal on an awesome house. 

On the other hand, technical analysis aims to capitalise on stocks by predicting their future price movements. It is based on the idea that past price movements and trading volumes can provide insights into future price movements. think of technical analysis as looking at a graph of a roller coaster`s previous rides to predict how it might move in the future. By examining the ups and downs of the roller coaster`s past rides, you might be able to make an educated guess about its upcoming twists and turns. 

Though fundamental analysis is the best approach for a long-term investor, one can enhance profitability by making use of some of the techniques of technical analysis. Combining the 2 approaches can yield optimised returns in the long term.

Below are 3 of the ways one can incorporate technical analysis into a long term investing framework:

 Spotting Correlations

There exist certain strong positive or negative correlations between asset classes. For example, there exists a negative correlation between stock market returns and interest rates. When interest rates rise, markets are known to perform poorly. Technical analysis involves analysing price movements and identifying patterns that exhibit similar behaviour across different asset classes. This can be done by plotting the historical prices of 2 or more asset classes over time using charting tools like TradingView. Here`s an example of a somewhat positive correlation between Nifty 50 and S&P 500:

Note that the yellow line indicates S&P 500

You can see how Nifty 50 and S&P 500 exhibit a positive correlation over the long term by looking at the direction of their performance.

 How to use it - Plot price movements of the asset classes you want to analyse. Apply the selected technical indicators to each asset class and compare their readings. Look for instances where the indicators exhibit similar patterns or convergence/divergence across different asset classes.

 
Optimising Entry and Exit Points

Traders use chart patterns to make money with short term trades. They look at historical price movements to identify the right time to enter and exit a stock/asset. Such strategies improve the success probability of a trade.

 Investors can use these patterns to optimise their long-term trades. For example, you study a stock and find it fundamentally attractive. Instead of buying it at any price, you can use technical analysis to identify a good entry opportunity and improve the predictability of its short-term movements.

 How to use it - Look for patterns like double bottom, double top, head & shoulders, and support / resistance levels to optimise your entry and exit prices. Developing a basic understanding of candlestick patterns is helpful. Below are a few of the most common technical chart patterns used by traders:

Volume Analysis

Volume analysis is a technique used in trading to analyse the trading volume of a particular security, such as stocks or commodities. It involves studying the volume of shares or contracts traded over a given period. When prices rise or fall accompanied by high trading volume, it suggests that the price movement is supported by active participation from institutional investors, i.e., ‘smart money’ is involved, making it more reliable. Hence, it helps confirm the strength of price movements.

 Often, strong price movements are preceded by huge investors entering a security. Volume spikes or surges indicate increased interest and shifts in market sentiments.

 How to use it - It can be used as a confirmation tool before buying/selling a stock. Rising volume seen in the direction of the trade you want to take is a good sign. Below is an example of high volumes spotted in a gold chart:

Source: Investing.com

Limitations of technical analysis

Remember though, that every technique has its shortcomings. There is no guarantee that history always repeats itself. Technical analysis does not have a 100% success rate, and one needs to establish stop losses and tread with caution.

 However, its predictive power certainly improves when combined with other approaches, i.e., fundamental analysis.

 In conclusion, combining fundamental and technical analysis can be a powerful approach to making well-informed investment decisions. Each method has its strengths and weaknesses, and by utilizing both, investors can gain a more comprehensive understanding of a security or asset`s potential.