Technical analysis for newcomers
- VFX Blog
- For beginners
Technical analysis is a widespread way of how to make money on binary options forecasting the movements of different financial assets (stocks, currency pairs, binary options). This is the substitution to fundamental analysis which examines the economic and political situation, statistical data, market sentiments, and rumors. Unlike the previous method here only the mathematical algorithms for assessing historical data are utilized here.
The essential postulates were created by Charles Dow and appeared in several articles in Wall Street Journal 1900-1902. The author used historical information on the stock market, nevertheless, this theory provides a stable profit also in Forex and binary options signals. Here are the basic principles:
- Price involves everything. In the current quote and market, the movement has already taken into account all the trends, moods of participants, and other factors that may affect the formation of the current price. You can not use fundamental analysis. In the current quotation, the movements have already considered all tendencies, moods of market players, and as well as other aspects that could change the development of the existing price. You don’t need to apply the fundamental analysis.
- History repeats. Dow statistical data demonstrates that market tendencies, specifically the changing of peaks (up) and troughs (bottom), are rather stable and repeat after a while. This property is utilized in mathematical algorithms of technical indicators.
Price tendencies are continuously present and complement one another. The price does not move randomly and at each moment there is much more suitable movement: up, down, or in the side range: up, down, or sideways. Also, one can be identified as "incorporated" in other tendencies:
- Primary. Here are long-term (from a year or more) tendencies, which open deals for major players and hand funds.
- Secondary (month to six months). Shows kickbacks and corrections of a long trend. Here is the majority of the market players.
- Small. Quick and multidirectional price movements, from several minutes to several hours. The reason is most commonly the publication of fundamental news and statistical data, but the technical analysis doesn’t apply this. During these periods, scalpers, binary options signals, intraday traders, and HFT algorithms work more.
Dow Theory states that at any given moment, directional movements can be found on a trading tool. However, the actual market rebuts this principle and most of the time (up to 70%) is albeit in a large, but still lateral range. The assessment of medium-term and long-term analysis stays.
Significant points of the technical analysis:
- A tendency or its change needs to be confirmed by volumes. Experts have long discussed what the market volumes define the accuracy of the long forecast. Especially in the Forex market where there is no data about the cash volumes of open transactions, however, the rule functions — the volumes should increase both with growth and with a fall in the market. We have only a short-term strategy for binary options if this is not the case.
- The tendency continues until a reversal signal shows up. This is one of the most significant rules — be sure to wait for a reversal when opening the opposite position or closing the current one.
Types of technical analysis methods
Forecast methods can be mathematical and graphic. The graphic examination makes constructions in the form of special lines:
- Trend lines displaying the current speed and direction (according to their angle of inclination) of the current price movements;
- Support and resistance, which establish the limitations of the side are defined and the levels from which the price is pushed repeatedly. This price conduct can be seen at crucial max/min (week, month) or in places where there are many large pending orders. Opening at the breakdown of such levels allows you to receive significant profit;
- Trend continuation or change patterns. The binary options guide demands obligatory confirmation of the candlestick analysis reversal patterns, although you cannot apply them during the trading process.
- Tick. Every price change (tick) is displayed contrary to other graphs, a tick does not present for what time and how much the price fluctuates — a new point shows up only after a new tick. Tick graphs are not suited for manual trading. Only for testing automatic expert assistants and binary options signals, where they provide more precise data compared to the minute timeframe.
- Line. There is already a value and time of price change, but as in the tick it is hard to identify the range of its change, without which visual examination is impossible;
- Column (bar). The main chart on the stock exchanges before the candlelight spread utilizes four main prices: open, close, high, and low. Offered in all popular binary trading platform;
- Candles. It was made more than two centuries ago in Japan as a fully self-sufficient method. Like the bar, it uses four types of prices, but with a more practical shown. Now the most common price chart in all financial markets.
- Elliott's wave theory, affirming the principle of nesting price trends. The theory in its wholeness is complex for newbies, but there are simpler interpretations like Wolf waves.
- Elliott was the first to show the existence of an eight wave market cycle on any trading asset: five waves will be the essential (trend), three are corrective. The pattern repeats on all timeframes and, as it continues, it depends on the Fibonacci number.
- Fibonacci numbers. Technical analysis may not expose obvious continuation or reversal patterns; even trending can be an issue. There are always strong price levels and can be identified using Fibonacci numbers. Even newcomers applying solely this indicator can precisely figure out when to open/close a transaction and where there are support/resistance.
- Price gaps. The occurrence, when the price of the next opening is more or less than the closing price of the previous bar, is more common in the stock market. But on Forex, a gap is a common situation. We can say that gaps are not exactly a technical binary options strategy since the reason for their appearance is the banking and over-the-counter transactions after the closure of the main trading sessions.
- A long price movement near a level with at least two touches (retests) is named consolidation. The more retests, the higher the credibility of a new trend;
- Support/resistance are also consolidations. To identify them, 2-3 of the last price highs/minimums are needed. Be careful when trading intensively — don't look for a level where it's not!
- Сhanging the trend support/resistance is reversed.