In order to be able to develop effective binary options strategies you need to understand technical analysis. This post is designed to equip you with the basic terms and concepts of technical analysis.
Basically, technical analysis is the studying of investor behavior as well as its influence on the price action of financial instruments. The primary information which we have to carry out our studies would be the price histories of the instruments, along with time and volume data. All these allow us to make our predictions, depending on objective data.
In addition, technical analysis keeps track of and analyzes the ways by which investors behave. In technical analysis we use charts to predict asset price movement and develop our strategies. Each chart has its unique advantages.
Here are samples of chart types that are being used in technical analysis.
This is actually the most basic chart format and is produced simply by using a line to join the data points. The most typical use for line charts is for indicators that just have a single daily value (as opposed to high/low) for instance momentum or moving averages.
Here’s a sample of a line chart:
- Bar charts use vertical bars to show the price action of the underlying asset for a specific day, it indicates the lower and the higher price for the day.
- Bar charts use vertical bars to represent price action for that day, drawn from the lowest price to the highest price.
- Bar charts have indicators for the high and the low price of the asset. The left hand “notch” indicates the opening price of the asset and the right hand “notch” indicates the closing price.
- Bar charts scales can be modified to show daily, weekly or monthly bars.
Here is a sample of a bar chart:
- Candlestick charts offer a more detailed visual representation of bar charts. A down day is indicated by a black or shaded box. The “box” shows the open to close range. The “wick” displays the full day’s range.
- Candlestick charts are generally plotted over a one-day period but technical analysts also use weekly and monthly candlestick charts to provide a valuable picture of the longer-term price action.
- Candlestick appeal lies in its ability to give a clear visual representation of the price action during a period, leading to easy-to-recognize pattern recognition.
Here is a sample of a candlestick chart:
Support and Resistance
Support and resistance is essential in creating a disciplined binary trading strategy. Prices are dynamic, highlighting the ongoing change in the balance between supply and demand. By determining the price levels at which of these balances change we are able to plan the price level where to trade.
- Support represents the level where buying pressure is powerful enough to absorb and overcome the selling pressure.
- Resistance is the opposite of support and is the level where the volume of selling (supply) exceeds the volume of buying (demand).
Here is a sample of support and resistant levels:
The moving average is probably the most widely used indicator and is used by technical analysts for numerous tasks.
The primary benefits of moving averages is first of all that they smooth the data and therefore offer a sharper visible picture of the present trend and subsequently, that moving average signals can provide an accurate answer as to what the trend is. There are actually two major types of moving average:
- The simple moving average calculates the average price over a specific moving time period.
- The exponential moving average also averages the last x day’s closes but designates a greater weight to the more recent prices.
Here’s an example of moving averages: