Technical analysis is one of the methods commonly used by options traders to predict price movements and market trends by studying the charts and various parameters of past market behavior. Technical analysis is only concerned with what has actually happened to the asset, and takes into account the changes in price of the asset and the volume of trading. There are many indicators and tools that traders use for technical analysis, among them RSI, Moving Average, Bollinger Bands and more.
Support and Resistance
One of the most commonly used tools in technical analysis is support and resistance. Support and Resistance can be implemented to Binary and Pair options. The idea is to identify support and resistance levels for each asset. The support and resistance lines are the levels the stocks have historically had difficulty to fall below (support) or to go over (resistance). The levels are considered stronger the more times an asset has been unable to move beyond it.
How to identify Support and Resistance lines?
Identifying support and resistance levels can be done based on using technical charting software or by following the charts of Stockpair.
Moving averages are a tool for traders to understand a current trend and its direction. This is done through a formula derived from looking at the recent data points of a given asset within a time frame. There are two types of moving averages:
Simple Moving Average (SMA) and Exponential Moving Average (EMA)
Simple Moving Average
The calculation for a simple moving average is very similar to the calculation of a mean. Let's take an example of a 10-day moving average.
Total sum of last 10 closing prices / 10 days = SMA
The same formula is applied over any time period the trader wants to examine. The major difference between the SMA and a mean, is that with this method new data points replace the oldest ones, thus turning it into a "moving" average that is constantly updated.
Exponential Moving Average
The biggest difference between the simple and exponential moving average is that with EMA more weight is given to recent prices and that emphasis is implemented in the formula. This formula is significantly more complicated, but luckily, completely provided for you on the Stockpair technical analysis chart.
Bollinger Bands is a tool used to assist traders in determining whether an asset is overbought or oversold. The bands are essentially a central line, which is an EMA, and two "bands", one above and one below. Each of these bands represents a price channel. Traders get their cue from the bands by whether they expand or contract. If they expand it means there is volatility with the asset, if they contract it means there is a tight trading trend. Bollinger Bands move with market conditions, and as such have become extremely valuable for traders with extreme short-term prices.
Relative Strength Index (RSI)
The relative strength index measures the speed and change of prices in an asset over a certain time period. It is mostly used as a momentum indicator, as it evaluates the relevant strength of an asset's price performance. Traditionally, if the RSI values are 70 or above it indicates that the asset is being overbought and if the reading is 30 and below it indicates overselling. With this information, traders can try to expect a correction of an asset once it reaches these levels.