Technical analysis is a universal method for predicting the movement of any financial asset (currency pair, stock, futures or options). Is an alternative to fundamental analysis, which uses economic and political events, statistics, rumours and market sentiment. Only mathematical algorithms for processing historical data are used here.
The basic principles developed by Charles Dow and published several articles in WallStreet Jornal 1900-1902. The author used historical data on the stock market, but the theory gives a stable profit also Forex market and binary options signals. Basic principles are:
- Price includes 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.
- All repeats. Dow statistics show that market trends, especially the change of peaks (up) and troughs (bottom), are quite stable and repeat over time. This property is used in mathematical algorithms of technical indicators.
Price trends are constantly present and complement each other. The price does not move randomly and at each moment there is a more preferable movement: up, down or in the side range: up, down or sideways. Also, each can be identified “included” in each other trends:
- Primary. Here are long-term (from a year or more) trends, which open transactions big players and hand funds.
- Secondary (month to six months). Represents corrections and kickbacks of a long trend. Here is the bulk of the market crowd.
- Small. Fast and multidirectional price movements, from several minutes to hours. The reason is usually the publication of fundamental news and statistics, but technical analysis denies this. During these periods, scalpers, binary options signals, intraday traders and HFT algorithms trade more.
Dow Theory claims that at any given time, directional movement can be found on a trading instrument. But the real market refutes the rule and most of the time (up to 70%) is albeit in a wide, but still lateral range. The possibility of medium-term and long-term analysis remains.
Technical analysis holds:
- A trend or its change should be confirmed by volumes. Analysts have long debated to what extent forecast accuracy depends on market volumes. Especially in Forex where there is no information about the cash volumes of open transactions, but the rule works – the volumes should increase both with growth and with a fall in the market. If this is not the case, we have only a short-term trend.
- The trend continues until a reversal signal appears. This is one of the most important rules – be sure to wait for a reversal when opening the opposite position or closing the current one.
Classification of technical analysis methods
Prediction methods can be graphic and mathematical. Graphic analysis makes constructions in the form of special lines:
- Trend lines showing the current direction and speed (according to their angle of inclination) of the current price movement;
- Support and resistance, which determine the boundaries of the side are defined and the levels from which the price is pushed several times. This price behaviour can be seen at key max/min (week, month) or in places where there are many large pending orders. Opening at the breakdown of such levels allows you to get good profit;
- Trend continuation or change patterns. This also includes confirmation of reversal patterns of candlestick analysis, although you can not use them in the trading process.
Mathematical methods are based on the processing of historical data, as the principle of “price takes everything into account” implies. Technical indicators clearly show the dynamics of price changes: trending, where the market goes, oscillators how this movement occurs.
Types of price charts
A trader can choose from several options for displaying price quotes:
- Tick. Each price change (tick) is shown unlike other charts, a tick does not show for what time and how much the price changes – a new point appears only after a new tick. Tick charts are not suitable for manual trading. Only for testing automated expert advisors and binary options signals, where they give more accurate information than a minute timeframe.
- Line. There is already a time and value of price change, but as in the tick it is difficult to determine the range of its change, without which visual analysis is impossible;
- Column (bar). The main chart on the stock exchanges before the candlelight spread uses four main prices: open, close, high and low. Available in all popular binary trading platform;
- Candles. It was created more than two centuries ago in Japan as a completely independent technique. Like the bar, it uses four types of prices, but with a more convenient shown. Now the most popular price chart in all financial markets.
In addition to the above, other charts take into account only the price: “tic-tac”, Renko and Kagi. Despite the information on their effective use, they are available only in the form of additional indicators, mainly used in the South Asian region.
Trading Strategies and Custom Analysis
For market analysis and trading, combinations of technical indicators are used that give signals for opening/closing transactions. The basic rule of all strategies: do not use only one instrument for a trade order, confirmation from others is required. Here’s an example of simple strategies on two indicators: trend Moving Average and RSI oscillator.
We made sure that the basic principles work well and allow them to be used to create new exact binary options strategy that is understandable to professional’s traders and newbies. Among them are:
- Elliott’s wave theory, confirming the rule of nesting price trends. The theory in its entirety is complex for beginners, but there are simpler interpretations such as Wolf waves.
Elliott was the first to prove the presence of an eight wave market cycle on any trading asset: five waves will be the main (trend), three corrective. The pattern is repeated on any timeframe and, as it develops, is determined by the Fibonacci number.
- Fibonacci numbers. Technical analysis may not reveal strong continuation or reversal patterns; even trending can be a problem. There are always strong price levels and can be found using Fibonacci numbers. Even beginners using only this indicator can accurately determine when to open/close a transaction and where there are support/resistance.
The closer the price is to the level, the more likely is a reversal or continuation of the trend in the direction of the breakdown. The figure shows how the price goes along the Fibo lines.
n addition to the lines can be used fan, spiral, arc and Fibonacci time zones. The tools are included in the basic set of all popular trading platforms, such as MetaTrader.
- Price gaps. The situation 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, gap is a common occurrence. We can say that gaps are not exactly a technical analysis since the reason for their appearance is the banking and over-the-counter transactions after the closure of the main trading sessions.
This is true, but at the same time, the gaps confirm the Dow rules – the return of the market to the previous values (closing gaps) indicates that the price takes into account everything and is confirmed by market volumes.
In most cases, gaps close to an empty area, which allows you to make a profit when you can’t get a clear forecast on the indicators (the same situation when strong news comes out when technical analysis and most free binary signals do not work).
Recommendations about use …
- The larger (longer) the time frame for technical analysis, the more accurate the signals and patterns. Beginners, especially with small deposits, start trading with scalping, try to earn fast. This strategy is immediately wrong – such transactions are profitable only for professionals who can work with incomplete figures and hidden supports/resistance. But even before they open positions for 5-10 minutes, they analyze the situation over the past 4-6 hours.
- Trading by level:
A long price movement near a level with at least two touches (retests) is called consolidation. The more retests, the higher the probability of a new trend;
Support/resistance are also consolidations. To determine them, 2-3 of the last price highs/minimums are sufficient. Be careful when trading intensively – don’t look for a level where it’s not!
When changing the trend support/resistance are reversed.
- The reliability of the trend is determined by its duration and the number of touches of the corridor line;
- The speed of price movement is determined by the angle of the trend lines or the Moving Average (see an example of a strategy);
- Newbie’s during lateral movement it is better to avoid trading from the borders of the channel, especially narrow. It is better to wait for the breakdown and then enter the trend;
- Prices usually fall faster and shorter in time than they rise.
To summarize we remind you that technical analysis and all binary option bot work on historical data – there is no other strategy for the market forecast yet! But analysis of past data leads to a delay in indicators relative to the current market, so binary signals may appear when the optimal opening moment is already missed. It is impossible to completely get rid of lag; always confirm the signals of oscillators and indicators with visual patterns.