Many brokers advertise online trading as a fast, easy and low-risk way of making money. “It’s easy” they say… just choose a direction and then trade accordingly. Ok, but that is similar to Felix Baumgartner – you know, the guy who jumped from the stratosphere – telling me “Look dude, you just step off the platform and you are on your way. It’s so easy that everybody can do it”. Well, as you might have thought, choosing a direction when trading Contracts For Difference or even Binary Options and jumping from the stratosphere successfully are no easy feats and although I don’t know what preparations you need to make in order to jump with a parachute, I have a slight idea what technical trading is.
Charts are the basis of technical analysis! They are a graphical representation of an asset’s price movement over time and can come in the form of candlestick charts, bar charts or the common line chart. The movement of an asset creates certain patterns that repeat themselves and people noticed this from the early days of trading. By analyzing these patterns and comparing them to similar ones that were created in the past, traders can make a prediction about an asset’s next direction.
In other words, a Double Top pattern usually triggers a move down, so if the trader spots this pattern on his current chart, he can assume that price will behave as it did in the past and thus a move down is expected. A Double Bottom is a pattern that usually results in a move up so if you spot it on your charts, you know the asset has improved chances of moving north. There are a lot of chart patterns and I don’t want to go into all of them in this article so a good place for you to learn more about them and their predicted outcome is this article: Chart Patterns – Follow the Money. Of course, not all possible chart patterns are explained there – I would probably need to write a book for that – but the most important and common ones are there.
Keep in mind that chart patterns are not some mystical way of predicting the market’s next direction with 100% accuracy, but they give us clues about the probability of a move. For example, if several indicators point to one direction and you see a chart pattern that agrees with that direction, the probability of that move occurring is higher. Nothing is 100% certain in trading and don’t believe anyone who tells you otherwise… well, charts move always to the right side, that’s 100% certain.
With the use of technical analysis, traders can also determine whether the asset is in an uptrend or a downtrend. The generally accepted rule is that a chart is in an uptrend if Higher Highs and Higher Lows are printed and a downtrend is present if Lower Lows and Lower Highs are displayed. Of course, there are exceptions to this rule so take it with a pinch of salt. And one more thing: if you’ve identified a trend, don’t jump in immediately; look for retracements, weakness or strength, signs of exhaustion, etc. Correctly identifying the trend should be an important part of each trader’s analysis, so if you want to become better at it, I recommend reading The Trend is Your Friend, Simple Trend Line Strategy and Trend Line and Chart Patterns Strategy.
Support and Resistance
Another important part of technical analysis is Support and Resistance. If the price rises to a level and bounces lower, failing to surpass it, that level is considered Resistance. When the level is reached again, considering that price bounced off it in the past, usually traders expect history to repeat itself and the asset to bounce lower again. The opposite is true for Support, which is a level that stopped falling prices in the past so traders expect a rise after an encounter with support. Both Support and Resistance (commonly referred to as S/R) are key elements of technical trading, in fact of trading in general. At first, it can be tough for newbies to identify on their own S/R levels on their own but some good old indicators can do it automatically. You will find this indicator and a full explanation on how to use it here: Support – Resistance Custom Indicator: Doing The Hard Work For Me and if you are still hungry for more, check out Pivot Points Binary Options – Support and Resistance on Auto Mode.
Maybe the most important and complex part of technical analysis is represented by technical indicators such as the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), Stochastic Oscillator, Moving Averages and a lot more. I won’t go into details about these indicators as they are thoroughly explained in standalone lessons but what you need to know is that all indicators are derived from price and they try to represent price action in a different way than candlesticks or bars. However, you cannot rely blindly on indicators to show you how to trade because as I said, they are derived from price and price can change direction when you least expect it.
Wrapping it up
As you can see, Technical Analysis is composed of more than one thing and the truth is that if you try to use just a single part of it, the success chances drop significantly. Experienced traders combine all the tools offered by Technical Analysis in order to find good trading opportunities and the infamous “Direction” of price. This article barely touches the tip of the iceberg called Technical Analysis because it’s meant to be just an introduction to what will come, so now you can probably understand that brokers don’t know what they’re talking about when they say: “It’s easy. Just pick a direction and trade”.