The financial market, by itself, can seem random and unpredictable. This is before you apply a certain structure to it. One of the ways that you can provide this framework to the markets is through technical analysis. This form of analysis is also known as chart analysis.
This is because it uses graphical representations of events in the market to determine how a particular asset will behave. Most traders turn to this type of analysis to help them improve their trading strategies. This is because it tends to have the most positive and consistent results when compared to other techniques.
Therefore, this introduction to technical analysis will be become very important to any future trades that you place.
Technical analysis can essentially be broken down into three main important components. These are:
Price Movement is Key
As mentioned above, technical analysis depends on charts to determine how certain asset will behave during a particular time period. This means that it, essentially, only takes price movement into consideration. Now, on one hand, this can seem to be quite limiting.
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However, individuals who utilize technical analysis have the understanding that the overall price movement encompasses so much more than just value. In fact, it can be considered to be the sum total of numerous factors including fundamental analysis.
Therefore, you get to determine how other individuals regard a particular asset. This, in turn, gives you an idea about the direction in which the price will move.
Price Movements Lead to Trends
If you choose to follow technical analysis, you are conceding to the fact that the movement in price results in trends. Now, prices can either move up, down, or remain steady. On a chart, this will be displayed as zigzag lines that are either moving upwards, downwards, or are continuing sideways.
Traders who rely on technical analysis believe that these trends will hold, at least for a time. This means that they tend to always follow the trend, regardless of the direction in which it is moving. However, these trends can change according to different times.
In certain instances, you may find that there are several trends taking place at the same time. Some of these trends may even be opposing one another.
Events Will Reoccur
The final theory of technical analysis is that at one point or another, an event that has taken place in the past will occur once more. This can be identified by looking at charts and figuring out whether a pattern that has appeared in the past is reappearing.
Thus, based on the trend that took place previously, the traders will make a related trade. It is important to note that the traders who follow this method aren’t really concerned why the prices are moving in the manner that they are. They are more focused on predicting a certain outcome based on past experiences.
As you know, there are more than one type of analysis for binary options trading. Therefore, you may be wondering why technical analysis is popular when compared to the rest of the choices. One of the main reasons is because of the time frames associated with this form of trading. Unlike other types of traders, binary options traders deal with much shorter time intervals. Sometimes, trades can just last a matter of seconds.
This time limitation is what causes the appearance of disorganization. As such, fundamental analysis can become quite useless in such situations as it cannot be accurately applied. This is when relying upon price movements and trends will come in handy. It ignores all of the static and focuses on what is truly important, for that time period.
This is your introduction to technical analysis. With it, you will be able to make more logical decisions when it comes to your binary options trading.