An Introduction to Technical Analysis

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Technical Analysis is a method used to evaluate the underlying assets of spread bets by studying the statistics generated by historical market activity, such as past prices and volume. Technical analysts do not attempt to measure an asset’s intrinsic value but instead use charts to identify patterns that can suggest future activity. You will find that Technical Analysis can help you extensively improve your spread betting performance.

How to use Technical Analysis

Technical analysis is a powerful tool that can aid you in forecasting the future directional movements of the underlying assets by analyzing their historical trading patterns. Essentially, you will aim to acquire a detailed understanding about the trading formations and trends created by the price of these assets. Even those investors who favor strategies based on fundamental analysis will still deploy the concepts of technical analysis as validation tools.

You must first appreciate that technical analysis is founded on several key fundamental concepts. For example, this study focuses specifically on the price movements of assets and does not consider the sentiments or outlooks of traders whatsoever.

Technical analysis depends heavily on the viewpoint that the price history of an asset possesses a strong drive to constantly replicate itself by creating predictable price formations. Consequently, your primary goal will be to detect new quality entry opportunities for spread bets by learning how to recognize these repeatable formations.

As expert consensus expresses the opinion that the prices of assets advance in well-defined trends, they do not consider that their associated fluctuations are just random without any structure. For example, when they perceive that price has been proceeding for some time in its preferred direction then they will assume that it will carry on doing so unless a major catalyst emerges causing it to reverse course.

In addition, if you integrate the concepts of technical analysis into your strategies then you will find that it will enable you to trade with a more methodical and logical approach. Although Technical Analysis is far from perfect, it can still definitely help you produce superior and non-emotive trading judgments.

Popular Indicators used in Technical Analysis:

 

The Importance of Trading Charts

Technical Analysis concentrates on the study of trading charts with the primary intent of detecting quality trading opportunities for spread bets exhibiting optimum profit potential with minimum risk exposure. The three most commonly types of charts used by traders for this purpose are the Line chart, the Bar chart, and the candlestick chart.

 

Introducing the Line Chart

The Line Chart is the most basic of these three types and is formed by connecting a series of key price points together with a line.  For instance, the closing and opening prices are often used to fulfill this objective. Consequently, as the line will then track price, you can use this type of chart to aid you in forecasting the future movements of all assets of interest.  You are also advised to utilize the line chart with long time-frames ranging from the hourly upwards. This is because you will then obtain a more reliable picture of past price formations which you can then deploy to forecast future movements. The following diagram shows a line chart.

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Bar Charts

Alternatively, you could decide to utilize a Bar Chart which presents the closing price, low price, opening price, and high price of each time frame, as illustrated in the following diagram.

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The next figure illustrates a bar chart using the daily time-frame for the EUR/USD currency pair. Again, you can utilize such a diagram to help you predict the future movements of assets.

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Candlestick Charts

Trading charts can also be adapted to exhibit candlesticks comprising the closing, opening, high and low prices for each period of time that it represents, as shown in the following diagram.

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The distance between the highest and opening values of a candlestick is labeled the wick while the distance between the lowest and closing values is termed the tail. Candlesticks are powerful technical indicators because they have been utilized successfully by traders for hundreds of years. During this period, many famous candlestick patterns have been recorded. You can acquire increased success utilizing candlesticks if you again study them on trading charts deploying the hourly time-frame and higher.

 

Confirmation using Candlesticks

After you have detected a new entry opportunity for a spread bet, you should then seek additional validating evidence confirming its quality before taking further action. Many experts advise studying candlesticks on the hourly charts of applicable assets as a good technique to achieve this objective.

Ideally, you must search for proof which will endorse your new opportunity by confirming that it definitely exhibits a high chance of success. Very importantly, you must remain totally objective when conducting such an analysis.

For instance, you should not just execute a new spread bet based solely on your gut-feelings especially if key technical evidence and events are advising otherwise. If you were to trade in such a manner for any extended time then you will definitely record many losses during that period.

If all of your trading strategies are failing to reveal new trading opportunities for spread bets, then you may be able to identify some by undertaking a direct study of candlestick patterns. If you do locate any using this technique, then you should research into the reasons why they have been created, i.e. fundamental or technical. You must then re-inspect your strategies with the intent of identifying any backup evidence confirming that these candlestick patterns are providing advance warnings of new entry opportunities. Another important use of candlesticks is that they can help you identify and confirm major price formations, such as reversals, breakouts, retracements and fakeouts, etc.

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