Written by: Sophie May
You’ve heard the phrase that in life history tends to repeat itself. For technical analysts, this principle justifies their attitude to the financial markets. Technical analysis involves the use of graphs and charts to examine past market action and so predict future trends.
3 types of charts
This is the most basic type of graph. It displays clearly the direction of the asset. Each bar shows the range of the asset movement over a set time. Lines at the side indicate the start and end prices. This is the most advanced and informative type of graph. Lines show the range and solid bars show the start and end prices of the asset over a set time.
Reading the graphs
You can easily tell from a graph whether the asset movement is:
- Bearish – see the downwards trend on the line graph above
- Ranging – see the fairly horizontal line across the bar chart above
- Bullish – see the upwards trend on the Japanese Candlesticks above
Time range of graphs
Graphs are available with different time scales. It is important to study the right one, relative to the time scale of the trade you will be placing, in order to gain a reasonable understanding of the past asset patterns. As a general rule, for intra-day trading, 1 hour charts give a good basic overview of the asset action. This means that each bar or Candlestick will represent an hour of trading. If you wish to chart a long-term pattern, perhaps ahead of trading on the One Touch platform, consider using 4 hour charts. For shorter binary options trades with nearer expiry times, it will probably be best to use a graph which displays the asset value at every 15 or 30 minutes.
Support and Resistance
Technical analysts often refer to support and resistance levels. These are levels which can be marked out on graphs and used to predict future changes in direction.
The theory is that if an asset is on an upwards or downwards trend, as some point, that trend will reverse. Calculating the support and resistance levels enables analysts to predict at what point this reversal will occur. This is extremely useful for informing the binary options trader about the probable future direction of the asset.