Technical analysis is one of the most important tools available for predicting financial market. It has been shown to be an effective resource for investors and is being increasingly accepted by participants in the market. If used in combination with fundamental analysis, the technical analysis can deliver a very precise assessment, which can make a difference in the execution of profitable transactions.
With a technical analysis one tries to predict future price movements by analysing the historical market performance. By using technical analysis one can establish whether the market will go through a downtrend, uptrend or sideways trend. Traders can find suitable times to get on or off for their orders by using the technical indicators they get from the technical analyses. A number of these technical indicators are found in volume graphs, price graphs and movement averages. Every type indicator serves a special purpose, such as the recognition of trends or establishing the strength of a continuity or a trend.
There is more objectivity to be found in technical analysis than can be found in fundamental analyses, because the emotional part of trading is removed from this type of analysis. Because traders who use technical analyses usually only trust the technical graphs for their investment decisions, they are often more disciplined. Times for getting on or off are outlined and planned in accordance with the findings of the graphs.
The six most important figures for technical analysts:
- Open: the opening price at the beginning of a period
- High: the highest listed price within a period
- Low: the lowest listed price within a period
- Close: the closing price at the end of a period
Trend trading is easy to understand and is frequently used when trading in Binary Options. With the aid of a graph, every trader can easily see if there is a trend, and if yes, in which direction this is going. (If there is no clear trend then there is ranging by definition). Trading according to a trend forms the basis of the majority of strategies.
In the financial world a trend is a clearly demonstrable direction in the price-setting of a financial product. That product may be a currency pair, but it also includes futures, indices, gold etc.
Most traders and technical analysts argue that prices move between a specific range about 70 to 80% of the time. Prices therefore move sideways (ranging) more often than they do in a trend. That makes successful trend trading difficult, but potentially very profitable.
The trend strategy for a trader is simple: ensure that you are there when the trend has just started. The opening thought for the trend trader is that the price keeps moving in the direction in which it is moving at that time; after all, there is a trend. If the price returns to where it was, there is apparently no trend, and the trader would gain nothing by trading.
Characteristics of a trend:
In case of an uptrend the price always reaches higher peaks (higher highs). In case of a downtrend it always reaches deeper troughs (lower lows). In between there is of course retracement, but the overall direction is clear. The image below is a good representation of what a trend looks like;
Range trading means taking positions with the purpose of profiting from the -temporary- range (sideways movement) in which the price moves. Again, this can be applied to currencies but also futures, indices, gold etc.
You can only tell that a stock exchange is ranging after it has been going on for a while. Since there must be resistance as well as support levels which are ‘kept’ (are not broken). Support is the bottom side of the price, where the exchange rate rises again and resistance is the top side, where the price lowers again.
The easiest way to tell whether a price is ranging is to simply look at the graph and search for the resistance and support levels.
The image below is a good representation of what a trend looks like;
The breakout strategy is a trading strategy whereby positions are taken at the time when the price breaks through a resistance or support level. There are various breakout strategies and they are used on all financial markets.