An Introduction To Trading Fixed Odds With Technical Analysis
There are two main categories of analysis. Fundamental analysis trys to determine the furture price movements of an asset by measuring its inherent value. In contract Technical analysis makes use of the historical price action of the market will determine its future direction. Traders sometimes refer to themselves as ‘Technical Analysts’ or ‘Fundamental Analysts’. To say that one or other analysis is better than the other is to miss the point. Both forms contribute to finding successful financial fixed odds trades and should be used by anyone trying to successfully trade the markets.
The primary tool of a technical analyst is the chart. This shows the price action of the instrument over a selected timeframe. Popular timeframes tend to be weekly, daily, hourly and the 15 minute charts. Short term day traders may well use charts where they can monitor down as far as 5minute or even 1 minute price action.
Several different forms of analysis exist for charts and specific theories and patterns have been developed to aid the technical analyst accurately forecast price movements. As an introduction to Technical Analysis, we have covered two of the most basic concepts which should be understood before building on your knowledge of technical analysis.
Support and Resistance
Support and resistance is probably one of the most fundamental concepts to grasp in technical analysis. Support and resistance helps to define the boundaries of price movement. They are in essence the reverse of the same concept. Support defines the level that buyers are prepared to come back into the market whereas resistance is the level where sellers begin to value the asset as overpriced and so sell it. So how are these levels defined? Well essentially they are simply determined by the demand for an asset at a particular price.
For example if the FTSE index fell towards 6000 many investors may view this as cheap and start buying back into the market. As they enter the market this may slow or reverse the sell off. Additionally 6000 may well be viewed as a good psychological point to enter the market. If sufficient traders believe this then the resistance level is likely to hold.
A support/ resistance line is regarded to be at its strongest when it has been tested many times and the asset has failed to move beyond it. Often when a price eventually breaks out’ through the level, this has been triggered by fundamental event news such as an interest rate change for example. When a level of support or reistance is penetrated this is called a ‘breakout’. Breakouts often lead to new periods of gains or losses as the market is re evaluated and sellers or buyers accelerate the breakout.
Not all support and resistance levels have the same strength. Generally the length of time that a support or resistance level has been in place determines the strength or weakness of that level. This reflects how much buying or selling pressure will be needed to penetrate the level. One general rule is that levels that in longer time frame charts tend to be stronger than those for shorter time frames.
Trending
A trend reflects the average rate of change in a stock's price over time. Trends tend exist in all time frames and all markets and show the general direction that the market is moving over a given time period. They are normally classified in one of three ways: Up, Down or Range bound. Up and Down trends are fairly self explanatory. They categorise the general direction that the asset is moving over the selected time period on the chart. This allows you to find some good fixed odds trading opportunites on the chart.
Uptrends – In an uptrend an asset rallies often with intermediate periods of consolidation or movement against the trend. It will see a series of higher highs and lower lows on the chart. Ultimately it will display a higher rate of price change over time.
Downtrend – In a downtrend an asset declines often with intermediate periods of consolidation or movement against the trend. It will display a series of lower lows and lower highs on the chart. Ultimately it will display a lower rate of pricing over time.
Rangebound - The price value of the asset will often swing back and forth for long periods between defined upper and lower limits. There will be no apparent directional movement of the price.
How long do trends last?
Trends tend to persist over time and can last days, weeks or even years. A longer term monthly trend may contain several shorter term daily or weekly trends within it. It is said “Let the trend be your friend.” and indeed a trend will tend to continue until a fundamental change occurs to break it. An obvious example of this could be change in interest rates which can often quickly the short term outlook on a particular currency pair. For this reason it is more often than not better to trade with the trend than against it.
Trends are actually fairly easy to identify and are represented on charts by the use of trend lines. Whenever the price gets near to either the top of the bottom of the channel, the trend lines act as support/ resistance to the price moving beyond them.