Technical analysis is a method of predicting an asset’s price movement, which is based on the analysis of charts using technical indicators. This type of analysis is an indispensable tool for every Binary Option trader. It helps to determine the direction of price based on historical data. The advantage of this type of analysis is that you can use it in short-term and medium-term forecasts, from intra-day to long term trading. The analysis is based on 3 axioms:
- The market considers everything. The factors affecting the market are already reflected in the price and determine the behavior of market participants.
- The price moves in a certain direction. Any price change has one of the three trends. The trend can go up, down, or there may be a sideways trend. The aim of the Binary Options trader is to determine the trend in its infancy and keep trading until reversal.
- The market has a good memory, or history repeats itself. The pattern of past situations finds its reflection in the present. The laws affecting the market remain unchanged.
The father of technical analysis is considered to be Charles Dow (1851-1902). In the late 19th century, he published a series of articles in which he outlined his observations of the stock market. His observations formed the basis of technical analysis. This type of analysis includes methods to determine the most advantageous point of entry into the market. It is worth mentioning that all the methods are based on an assessment of the volume of trading and price patterns. The tools that help make decisions are through graphs or charts as ways of displaying information: candlestick, bar, line, and other less popular types of charts, as well as the technical indicators, which are based on historical data of prices (moving averages, MACD, stochastic, etc). All the signals that are provided by indicators are advisory in nature. The use of indicators in conjunction with other tools to analyze the market, make your work as a Binary Options trader more efficient.
The most effective option is to combine the fundamental and technical analysis. Of course, it is quite difficult, but it will lead to the fact that your chances of getting a steady income from your trading process will increase significantly. Fundamental analysis is based on finding the causes of occurrence of a certain scenario, unlike technical analysis, which does not explain the reasons, but watching what happens to the exchange rate, company share prices, product price, etc. Thus, both analyzes are designed to complement each other.
The indicators are some of the most important assets that form technical analysis. They are exclusively related on price movements from the past until the present, so they don’t show the future, but based on them you can anticipate it for yourself. In order to be able to earn on price movements, it is necessary to analyze the huge amount of information, anticipating the fluctuations or adapting to them. The technical indicators can really help you once you know how to use them. They allow you to understand the processes occurring in the market to make the correct and effective prediction of the behavior of currencies and share prices for a certain length of time.
According to the basics of technical analysis, it is known that the market may be submitted in one of two states: trend or flat. On this basis, the indicators conventionally are divided into two types:
- Trend indicators – which indicate the presence of a direction, which is downward or upward. As examples, you can consider Moving Averages, MACD, RSI, OBV, and more.
- Oscillators – they have a high level of efficiency in the absence of a pronounced trend. Some examples are: Stochastic, RSI, ROC, etc.
In technical analysis the charts are very important because you can visually assess the price situation on them. You can find three main types of chart, though there are more:
- Line chart;
- Bar chart.
These are the most well-known graphical methods among traders. Each of them has its own advantages and disadvantages.
The line chart type displays only the closing price of the financial instrument for the given time period. Most analysts believe that the closing price is the most important, which is why it appears in the form of a graph.
The bar chart will determine the maximum price – H (upper point of the bar), the minimum price – L (lower point of the bar), opening price – O (dash to the left of the vertical bar), and closing price – C (dash to the right of the vertical bar). This type of chart is recommended for at time intervals of 5 minutes or more.
The candlestick chart type is built by analogy with bars, the distance between the opening and closing is colored depending on what is above: the opening price and closing price. This type of chart gained a lot of popularity because of its clarity and simplicity of construction.
Technical analysis cannot be used without timeframes, which are time intervals of quotations on the chart of the financial instrument. That is, the time which includes one bar or candlestick.
The most popular timeframes among traders are: M1 – 1 minute; M5 – 5 minutes; M15 – 15 minutes; M30 – 30 minutes; H1 – 1 hr; H4 – 4 hours; D1 – 1 day; W1 – 1 week; MN – 1 month. Based on these periods, you can choose your style of trading, like intraday, medium-term, swing, long term trading, etc.
Advantages of technical analysis
Even if the best recommendation for any Binary Options trader would be to combine both types of analysis, here are some of visible advantages that make technical analysis unique:
- Technical analysis allows you to choose the best time to enter the market. Some analysts use fundamental analysis to decide what to buy, and use technical analysis to decide when to buy.
- The chart is a simple and convenient way to display the price history of the financial instrument. The chart is definitely more convenient to use than a boring table with numbers.
- Simple technical analysis charts allow you to see support and resistance lines. Such price behavior suggests that supply and demand are at an impasse.
- Many technical analysts use the price of opening, closing, high and low in the analysis tool. In each of these four prices you have useful information. Separately, they do not tell you much, but together they can clearly show the behavior of supply and demand in the market.
- In technical analysis data is used in real time.
- You can benefit from many strategies made especially for technical analysis.
Generally, technical analysis is considered to be more preferred by short-term traders. This type of analysis is totally focused on price, so you are not interested in politics, economies, decisions, and so on. However, as mentioned above, an intelligent Binary Options trader would use both of them in making decisions. Carrying out fundamental and technical analysis should be a mandatory part of every trader’s day. It is the only way a trader can determine the sequence of actions and make the right choice.