TECHNICAL ANALYSIS: BASIC PRINCIPLES

Technical analysis uses calculations based on existing market data, as well as analyses of the wave-shapes on price charts, to make predictions about the future directions of prices. Moving averages and oscillators are two popular calculation-based technical analysis tools. Elliot Wave Theory and the use of Fibonacci numbers are the two main types of wave-shape analysis. Binary option traders can utilize all of these methods to predict the future prices in markets and place trades accordingly.

INDICATORS

Moving Averages

A moving average (MA) is a line that is overlaid on a price chart to smooth the data and show the direction of the market’s trend. Simple moving averages (SMAs) are calculated by averaging the closing prices from a series of previous trading periods. For instance, each point on a 20-period SMA on a price chart showing 5-minute intervals is calculated from the closing prices of the previous 20 intervals. A new point in the SMA is calculated and displayed every 5-minutes. Some traders using exponential moving averages (EPAs), which weight recent data more heavily in the calculation of each new point.

Oscillators

Oscillators are wave-shaped indicators that are typically plotted below price data on a chart. Some well known oscillators include stochastics, the moving average convergence divergence (MACD), and momentum. As the name suggests, oscillators show a line that vacillates up and down, lagging slightly behind real-time price data. As an oscillator line moves up, it will eventually move into an ‘overbought’ zone, which traders take as a sign that a market’s price should start falling soon. As an oscillator moves down, it will eventually move into an ‘oversold’ zone, which traders take as a sign that a market’s price should start rising soon. Most traders use the ‘crossover’ out of an overbought or oversold zone as a trade signal.

WAVE-SHAPE ANALYSIS

Elliot Wave Theory

Elliott Wave theory was developed by Ralph Nelson Elliott, who believed that stock market prices move in repeating, and thus predictable, wave patterns. He claimed that in an uptrend there usually occurs three primary up-thrusts, or impulses, each followed by a smaller pullback to the downside. The last pullback is the first of two downward impulses, each followed by a smaller pullback to the upside. Thus is one Elliott Wave cycle completed. At this point, the major trend will reassert itself or reverse to become a downtrend; either way, a new Elliott Wave cycle starts. Believers in this theory analyze charts to determine where in an Elliott Wave cycle a market is, which can reveal the direction of the next move.

Fibonacci Numbers

Fibonacci (or Fib) numbers are those famous numbers that turn up with amazing frequency in nature. The Fib numbers most commonly used in trading are percentages: 38.2%, 50%, and 61.8%. Fib traders claim, for instance, that when price retraces, or pulls back, 38.2% of a previous large move, then begins to turn again, the trend should resume. A pullback of 50% is considered an unclear or neutral sign of trend resumption. A pullback of 68.2% is considered a negative sign, or a sign that the prevailing trend is about to reverse. Fib percentages are used in similar ways to project the sizes of new trend impulses for the setting of profit targets.