SINGAPORE and LONDON–(Marketwire – February 15, 2013) – Many traders of CFDs and FX choose to ignore the whispers of major news stories and economic events when trading the financial markets. Instead, they look at the charts themselves, analysing the peaks and troughs in order to determine future trends. They’re called technical analysts, and this article will sum up the basics of this type of trading analysis — hopefully in about 60 seconds.
Technical Analysis vs. Fundamental Analysis
Technical traders only consider the historical movement of prices when opening a position in the market. They’re not interested in news events or economic data in the same way a fundamental analyst would be. Instead, they owe themselves to the opinion that all the insight is contained in the price itself. Technical traders therefore rarely stray from the charts, a strategy criticised by some who feel the approach is too shallow.
When analysing the charts, technical analysts typically look for signals and patterns in the price movement that help them to determine entry points.
These patterns often signal potential reversals in the market, and provide technical analysts the rhyme and reason to open a trade. Common patterns include the head and shoulders, the reverse head and shoulders, the double top/bottom, and the ascending/descending triangle.
Support and Resistance
The concept of support and resistance forms a key part of strategic and effective technical analysis.
The support price acts as a floor, and stops a price from falling any lower. Each time a price approaches or ‘tests’ a support price without breaking below it, the stronger the support is considered to be.
Therefore, technical analysts can use support prices to ascertain the price range of a given market. The reverse is true for resistance, which acts as a ‘roof’, containing rising prices in a period of uptrend.
Whichever type of trader you are, the financial markets can be volatile and risky. Ensure you read up on your chosen market beforehand, utilise strict risk management and never invest more than you can afford to lose. With margin trading, losses may exceed your initial deposit.
CFDs and margined Forex contracts are leveraged products and may result in losses exceeding your initial outlay.