Understanding the Technical Analysis Patterns

Understanding the Technical Analysis Patterns

Submitted by adil on Fri, 12/05/2014 - 13:08

Binary options traders use two types of analysis for trading, a technical analysis and a fundamental analysis to hedge their portfolio of assets against the risk of loss. Each analysis offers a variety of benefits, however, traders prefer to combine them for trading in order to have more favorable results. The technical analysis is used to define the expected movements in the price of underlying assets.

However, it is best to use technical analysis for the binary options that have a short term and medium term expiry period. For example, it can be used with the binary options that have an expiry time of 60 seconds, 60 minutes, or one day.

How Technical Analysis is performed?

In order to predict the asset price movement, technical analysis is used by binary options traders who use volume price charts and time price charts to assess the market and place their trades accordingly. Price chart is used to assess the price movement of different classes of assets including, currency pairs, stocks, market indices, etc.

A trader can choose from a variety of charts like line charts, bar charts or histograms, but all of these charts represent the price movement in terms of volume or time.

Time Price Chart – This chart uses time price changes, and plot different asset price fluctuations within a specific period of time. This chart is selected by traders on the basis of their trading strategies, and the time of expiry of their binary options contract. In case of short term trades, if a change in price occurs after every 1 hour, it can help traders in determining the expected price movement within a period of the next hour.

On the other hand, traders who pick a long term expiry period for binary options trading can analyze the price variations over a period of days or weeks. They can start from the opening price when the period starts, and can observe the fluctuations that occur during the period till the time the options expire.

Volume Price Chart – Binary options traders can also choose to analyze price fluctuations through trade volumes. They observe volume price charts where different points of asset price are plotted after a certain number of trades are executed. Sometimes, it is possible that the price of an asset, which had a low trade volume, suddenly fluctuates when large volume of trades are undertaken. Moreover, a change in a trade volume is an indication that the price of an asset will fluctuate.

The information about the trading volume and number of contracts executed in a given period is available on different binary options platforms where different classes of assets are traded every day.

Technical Trading Patterns

These patterns are formed in different sizes and shapes, its formation period varies from a period of 60 seconds to months. The length of time is entirely dependent on the time of expiry of a binary options contract. Double Tops and Double Bottoms are most commonly used patterns, and are formed when an asset price moves upward and then in a downward direction, move backward and then start all over again. However, if a price fails to move beyond the upward or downward direction, or if it doesn’t pull back beyond the original point, a new trend is likely to appear in the opposite direction. Other well-known patterns are head and shoulder patterns, and triple top and triple bottom reversals. The latter is somewhat similar to double top and bottom patterns, except that price tries to create triple attempt to push beyond the original point.

These patterns are usually supported by technical indicators, and are applied to different asset price charts in order to identify how strong or weak the current price is, and what will the expected movement in the asset price be. If these patterns are used with the technical indicators, a binary options trader can get a chance to place successful trades in the market.