Binary options Technical Analysis For The Novice Investor
The means of analyzing currency, assets and make investment decisions can be broadly divided into two categories: fundamental and technical analysis. While fundamental analysis involves analyzing the features of an asset or currency in order to estimate its value, Technical analysis employs an entirely different approach; it doesn’t consider the value of a currency, it focuses solely on the price movements in the market.
Despite all the fancy and exotic tools it utilizes, technical trading really just studies supply and demand in the market in an attempt to predict the direction, or trend of a particular asset or currency pair. In order words, technical analysis tries to understand the emotions in the binary options market by studying the market itself, as opposed to its component. If you understand the limitation and benefits of technical analysis, it can offer you a new set of skills and tools that will enable you to be a better investor or trader.
What is Technical Analysis?
Technical analysis is a method of evaluating assets by analyzing the data generated by the market activity, such as the past prices and volume. Typically, technical analysis does not attempt to measure an asset’s intrinsic value but instead use charts and other valuable tools to pinpoint patterns that suggest future activity.
Some technical analyst relies on the use of oscillators and technical indicators, while others utilize chart patterns and most employ a combination of the two methods. Unlike fundamental analysts, technical investors don’t care whether an asset is undervalued- the only thing that is important to them is an asset past trading statistics and what information this data can provide regarding the direction of the asset in the near future. For example, a trader analyzing USD/EUR currency pair technically would only be interested in the data from previous trading volume and price action.
There are three basic steps forming the basis of technical analysis
Market Action Discounts Everything!
This means that the price is a reflection of all components that is known to affect the market. Some of the factors are: fundamentals, supply and demand, political pressure factors and market sentiment. Pure technical analysis is only concerned with up and down price movements, not with the reasons for those changes.
One main criticism of technical analysis is the fact that it only considers price movement, without paying attention to the fundamental factors of the asset. However, technical analysis generally assumes that, at any given time, an asset’s price reflects virtually everything that has or could affect the asset- including all the fundamental factors.
Technical analysts generally believe that the asset’s fundamentals along with broader economic indicators and market psychology are all priced into the asset or stock, eradicating the need to consider these factors separately. This leaves only the price movement analysis, which technical analysts’ views as a product of demand and supply for a particular asset or stock.
Prices move in trends
Price movements are believed to follow trends in technical analysis. This means that as soon as a trend is established, the future price movement is likely to follow the same direction as the trend than against the trend. Technical analysis is used to calculate patterns of market behavior.
That market behavior has been recognized as significant. For many patterns there is a high probability that they will produce the expected results. You should also be aware that there are patterns that repeat on a predictable basis.
History repeats itself
Another vital tenant of technical analyses is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movement is usually attributed to market psychology. That is to say, market participant tends to provide a consistent reaction to similar market stimuli over a long period of time.
Technical analyses employ chart patterns to analyze market movement and understand future trends. Though many of these charts have been in existence for more than 100 years, they are still believed to be very relevant because they typically illustrate patterns in price movements that often repeat themselves.
Unlike most other tools, technical analysis can be used on any security with historical trading statistics. This includes futures, commodities, stocks, binary options and fixed-income securities. The concept of technical analysis can be applied to almost any type of securities. Though, technical analysis is more frequently associated with commodities and binary options, where the investors are predominantly traders.