Technical analysis is a broad umbrella term for a particular approach to market analysis. It has become increasingly mainstream as a means forecast financial price movements in recent years. This is in part due to both the greater acceptance of its validity and technological advancements which have made it much easier to apply to financial assets.
It is frequently contrasted with fundamental analysis which is the study of economic factors that influence price valuation.
At the heart of technical analysis is the use of historical data as a basis for forecasting future price movements. Historical data and price patterns are studied by the analyst who is looking to find repeating patterns to use as a signal for potential future price movements. Technical analysts however believe that prices already reflect all known influences before investors are aware of them. Therefore study is directed exclusively at currency price action. Once identified the trader will seek to exploit this information by identifying both the best entry and exit point for trading.
Several different schools and approaches to technical analysis exist, from raw price action approaches to those that rely solely on the number crunching of historical pricing. Each has its own particular outlook and seeks to provide the most accurate forecast and explanation for price movements.
What is common to all technical analysts is the chart. Some trades place their emphasis almost exclusively on physical pattern formations on the chart. Common patterns include the ‘head and shoulders’, ‘flags’ and ‘pennants’. These are used as visual signs of the market playing out classic price action which the trader can exploit for profit.
When you start delving into technical analysis you will come across entire trading approaches such as Candlestick charting and Elliott Wave Theory, as well as hundreds of individual technical indicators. These are typically mathematical transformations of price movements or indicators of market volume. Two of the most popular of these are moving averages and oscillators. These are used to identify short and long term trends as well as points where prices are overbought or oversold, so signalling points where price action may change.
As a discipline Technical Analysis can be as complicated or as simple as the analyst wants. From the perspective of the binary options trader, it provides one of the best ways in which to predict the short term movements that the binary options trader is looking to identify. For the most part, traders will combine both fundamental and technical approaches in order to validate their trading decisions. It can be worth thinking of fundamental analysis of answering the question to whether to trade while the technical reading answers the question of when to.
A common mistake that new traders make is to load up their charts with every indicator under the sun in the belief that this will give the best chance of success. However this is not a good way to trade. Technical analysis is not an absolute. Rather it is an ‘art.’ Yes It can be a great friend to the binary trader and therefore it is important to understand the basics of how it works. However use it as an element of your wider analysis rather than relying upon it completely.