The Basics of Technical Analysis

Trading is extremely rewarding once you find your preferred style and indicators. Truthfully, you are able to use any form of analysis you wish, such as fundamental analysis and technical analysis. For the purposes of this article, we will be touching on technical analysis. Technical analysis is the preferred study of traders because it focuses on charts and price action rather than efficiency ratios.

After deciding that technical analysis is right for your trading strategy, you must decide how to read the charts; patterns or indicators. Pattern traders look for familiar patterns in the chart of the asset to be traded. Some popular patterns are double top, head and shoulders and multiple bottom. On the other hand, we have indicator-based technical analysis that does not rely on patterns. Instead, the strategy uses indicators such as MACD, ADX and stochastics. As far as charts go, resistance and support are the main focus.

Both routes can not be learned overnight but pattern trading can be misleading. In order for the pattern to move the way you are expecting, the pattern must be pretty darn perfect; otherwise it’s a botched trade. Indicator-based trading is much more reliable when it comes to trading signals and the strategy calls for analyzing indicators not searching for patterns.

Whichever route you choose, be sure to make sure you thoroughly understand the concepts before continuing. Many new traders hear about a new strategy and try to implement it right away and, in the process, hurt their account balance. Confidence is needed to be successful in this business but it is healthy to have a little bit of skepticism in place to keep your confidence in check.

Prof. Binary’s Trading Tip:

A lot of traders prefer technical analysis to fundamental analysis, especially when it comes to binary options. Charts and proper chart analysis is the key to trading successfully in a technical way. Learn more about charts in this article.

Another important way to boost your confidence in your trading strategy is to use “paper” accounts, which allows you to trade on an account with fake money. These accounts will help you be able to focus on your strategy rather than making money or watching your account shrink. I understand that I bring up paper trading a lot but it is a major key to success. I am repeating myself in the hopes that you the reader will heed my warnings on the potential dangers involved with just jumping into a new strategy.

The key to success with technical analysis is learning the trading signals. If your moving averages have a downward cross, this is a sign that you should be looking for a trend change to the downside. This same is true when moving averages show an upward cross. If you are a pattern trader, you must become extremely familiar with the different patterns and be efficient enough to be able to pick the patterns out of the chart. Remember, the actual patterns are not going to be as clean and neat as the examples. Furthermore, if you use indicator trading, you must get used to the indicators and really learn when they give off signals. Being able to identify the trend will help you stay above the rest of the pack and grow your returns. In either case, “the trend is your friend”. Do not trade against the trend, unless your system is giving you signals that the trend is weakening and vulnerable to a correction.

The bottom line here is that technical analysis can be a very rewarding strategy when done properly. You must first educate yourself and determine whether pattern trading or indicator-based trading is your preferred strategy. Whichever path you choose, you must open a paper trading account and educate yourself. Go to the bookstore or an online retailer and pick up a few books on technical analysis, this will help you get off the ground and running. I wish you great success in your trading quest.