A beginner’s 2023 guide to CFD technical analysis: What is it, and why you need to use it.
Technical analysis is a method of evaluating underlying securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends that can suggest future activity. Technical analysis can be used to identify trends and patterns in the price of a security, which can be used to make buy or sell decisions. Here are some basic concepts in technical analysis that Australian CFD traders may find useful:
- Candlestick charts: These charts are used to visualize the price action of a security over a certain period of time. Each “candlestick” represents the price action for a single day, with the “wick” representing the highest and lowest prices for the day, and the “body” representing the opening and closing prices. Candlestick charts can be used to identify patterns and trends that may indicate buying or selling opportunities.
- Moving averages: A moving average is a trend-following indicator that smooths out price data by creating a constantly updated average price. The most common moving averages are the 50-day moving average and the 200-day moving average. A security trading above its moving average may be considered bullish, while a security trading below its moving average may be considered bearish.
- Support and resistance: Support and resistance are levels on a chart where the price of a security has had difficulty breaking through. A support level is a price at which a security has had difficulty falling below, while a resistance level is a price at which a security has had difficulty rising above. If the price of a security breaks through a support or resistance level, it may indicate a change in trend.
- Trend lines: Trend lines are straight lines drawn on a chart that connect two or more price points. They can be used to identify the direction of a trend and to help traders determine when to enter or exit a trade. An upward-sloping trend line may indicate an uptrend, while a downward-sloping trend line may indicate a downtrend.
There are many other technical indicators and chart patterns that traders may use in their analysis, but these are some of the basic concepts. It’s important to note that technical analysis is not an exact science, and past performance is not necessarily indicative of future results. It is always a good idea to use a combination of technical and fundamental analysis when making trading decisions. I have a more in depth article on CFD trading strategies here.