Technical Analysis, in a nutshell, is the forecasting of future financial price movements based on an examination of past price movements. It is applicable to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of supply and demand. When using technical analysis to trade look out for the following:
Technical Analysis, in a nutshell, is the forecasting of future financial price movements based on an examination of past price movements. It is applicable to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of supply and demand. When using technical analysis to trade look out for the following:
The Overall Trend
The first step is to identify the overall trend, a trend is really nothing more than figuring out the general direction in which your security is heading. This can be accomplished using trend lines, moving averages or peak/trough analysis (I will write an in depth article just on these three darlings in the near future.) The short and long of it is that as long as the price remains above its uptrend line the market is considered bullish. When studying the overall trend keep a lookout for the resistance and support levels.
Resistance Level – This is where the price tends to find resistance as it is going up. The price usually bounces off it and fails to break through. However, once the price passes this level it is likely to continue to rise. At this point trade up.
Support Level – Basically the opposite of the Resistance level, it is where the price tends to find resistance as it is going down. Should the price pass this level it is likely to continue dropping. At this point trade down.
Buying/Selling Pressure
Buying pressure can be defined as an increased demand for a particular stock’s shares, selling pressure is a decrease in demand for a particular share. Buying pressure creates a demand for shares which exceeds the supply, causing the price to rise. Selling pressure means there are more shares available than traders’ demand, resulting in decreased prices. You can measure the buying and selling pressure using the Chaikin Money Flow. When it is above zero, buying pressure is dominant, so trade up. When it is below zero, selling pressure is dominant, so trade down.
Relative Strength
To check this divide the security you are interested in by a benchmark. For stocks it is usually the price of the stock divided by the S&P 500. The plot of the line over a period of time tells us if the stock is rising, in which case trade up, or falling, trade down, comparatively to the major index.
Once you have examined the above information you will be able to ascertain the strength of the current trend, the reward to risk ratio of a new position, and potential entry levels for new positions. This will help you make informed decisions on what option is hot and what option is not, resulting in a better binary option performance for you.
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