Technical analysis is a little more complex than fundamental analysis, but quite within the abilities of the average financial trader. It is also known as chartism (or charting), since it often involves drawing up charts and making projections of market progress. In this section we will show you how to use these techniques and draw up the charts you will need. However, many of the financial websites which we refer to in this manual contain ready-made charts which you can consult.
Spread bets are, in the main, used for short-term gains – at least when compared with the long-term gains which are more commonly associated with traditional forms of financial trading. With both forms of trading, decisions made by investors usually occur once mixtures of factors have been taken into consideration. But for a short-term gain technical indicators are perhaps more relevant than any other single kind of analysis.
Although fundamental factors are important and will ultimately affect investments, it can take some time before companies and markets actually begin to feel the full effect. This is of limited help if you are looking for short-term gains. I’m not saying fundamentals aren’t important because they are, it’s just that they take time to kick in. Technical indicators are those factors that affect markets directly rather than underlying factors.
Charts are one of the most common ways in which to study technical analysis although they are not popular with everyone. I believe that the more information gained for predicting market behaviour the better; and charts have always provided critical insights. Although charts can sometimes appear unhelpful at times, more often than not, they provide a visual representation as to how the markets are acting. They are useful for all financial decisions and they are particularly useful for the FTSE indexes, American Wall Street indexes, individual shares, metals and commodities markets.
We will now look at several techniques and pieces of technical analysis you can undertake to help your decisions.
Spread Betting Technical Analysis
You will find that your profits improve enormously if you take time to look into how you can use technical analysis to help with your spread betting. Unlike the people who think that spread betting is just a gamble, you will know what to look for to put the odds in your favour.
The technical aspects of spread betting start with learning to read a chart, and develop from there. As with trading, it comes under the title of technical analysis. One of the most basic elements that technical analysis can help you identify is whether the price is in a trend upwards, downwards, or sideways. Sometimes when you look at the chart this is obvious, but particularly when it is in transition, for example when a trend is weakening and the price will start going sideways, technical indicators can help you identify this.
Why would you wish to identify trend? Because common trading knowledge suggests that a strong trend will continue, and you can spread bet for the continuation. If your technical analysis tells you that the trend is weakening, then that you have time to close the bet before the trend fails.
Another tool that helps you determine which way the price is going is the moving average. All charts have a facility for the moving average to be plotted, and the moving average can be applied to any time period. If the moving average is taken over a long time, then it will show the long-term trend; a short-term moving average can be used to trigger trading.
One of the popular indicators for showing whether a price is high or low relative to its past action is called the Relative Strength Index (RSI). This works best in a sideways market, when a high value often indicates it is time to sell and a low value suggests buying. The same interpretation can be applied in a trending market, though often the RSI will stay in the high range for an extended period time during an uptrend and at a low value in an extended downtrend.
Another very useful and common aspect of technical analysis is identifying areas of support and resistance. Support is a price level where historically the price has stopped going down and turned back up again. Resistance is a price level where the rising price has stopped going up and started to fall. These levels tend to act as barriers to price movement, and you may see the price oscillate between the two boundaries for some time before it breaks through one of them.
This concept is also used for weekly pivots. A weekly pivot low is a weekly bar with two higher lows on either side of it, and it may show an area of support. The weekly pivot high is a weekly bar with lower highs on either side of it, and this can indicate resistance.
There are many other indicators available in technical analysis, and if you want to spread bet profitably you would be well advised to learn about spread betting technical aspects.