Asset prices are very volatile and can be affected by a great variety of factors, from the company or sector-specific events to macroeconomic and global changes. Some of them are nearly impossible to foresee but many can be taken into account during your trading process. Deciding on how exactly to analyze and anticipate the market before opening a position is always a challenge and every trader has their own approach to this. The quick guide below demonstrates some of the general methods traders use to forecast markets. Let’s have a look.
Trend analysis on the trading chart
Technical analysis is one of the most common ways of predicting the price direction of an asset. Bars on the price chart can form many different patterns traders use to anticipate whether a certain trend will reverse itself or continue, including the head and shoulders pattern, double top, triangles, etc. Different patterns highlight different trends, some are suited for bearish and others for bullish markets; it is always a good idea to familiarize yourself with them and practice sufficiently on the Pocket Option Demo account.
Major economic events influence markets, some lead to small movements, and others cause large changes. There are also sector-specific events that may affect the assets of certain industries more than other markets. It is never a bad idea to be aware of what is going on in the world but it might be quite challenging to keep an eye on all of the global news all the time. Pocket Option gives you an opportunity to speed up that process by looking at the economic calendar and trading analytics, which highlight key events and news in a concise manner. These could be found under the “A” icon on the trading interface:
It is no less important to understand how exactly certain events will influence the markets, and that is why learning trading basics is the necessary starting point in trading.
Spot overbought and oversold areas
Overbought and oversold are terms used to describe the movement of a price of a security with an indication of what is likely to happen next. An asset is considered to be oversold when its price drops to extremely low levels, typically after a long downward trend. Once such levels are reached, a reversal can be expected. Likewise, an asset is said to be overbought when its price rises constantly up to high levels, without many pullbacks, and is expected to change direction soon after becoming too expensive. Oscillator indicators, such as the relative strength index (RSI), can help spot overbought and oversold areas and points of price reversal. RSI indicator reads between the range of 0 to 100 and shows the 30 and 70 value lines that are commonly used in interpretation. Consider the example below.
Once the RSI line drops below 30 (as pointed out by the arrow), the asset is considered to be oversold and is expected to reverse in an upward direction. Likewise, once the asset reaches above 70, it can be considered overbought and a downtrend can be expected to follow.
There are other examples of oscillator indicators that can be used to identify overbought and oversold areas, including the Average Directional Movement Index (ADX), Stochastic oscillator, and Commodity Channel Index (CCI) available on the Pocket Option platform.
Use Price Action
Price action is definitely one of the main things to be monitored on the price chart as it helps spot the right conditions to open a trade and analyze the market. Price action, generally speaking, describes the way an asset’s price moves over time which can be observed from the candles on the chart; many traders decide on trading positions based on price movements on the chart rather than indicators of technical analysis. It can be used to visually determine whether the market is bullish or bearish, but there are also different patterns that can form on a candlestick chart (one of the popular chart types on the platform), such as the engulfing pattern or three white soldiers, that can provide an indication of what comes next. It is quite common to add support and resistance levels on a candlestick chart that can confirm the conditions for an entry point into a trade.
Apply moving averages
A moving average is one of the simplest and easy to interpret indicators used in technical analysis that calculates the price of an asset over a certain period of time. It is possible to anticipate an uptrend when the price is moving above the moving average line, and vice versa, a downtrend can be expected when the price is below the MA line. The example below shows the moving average indicator set to the period of 12, with the price being below the indicator line, indicating a downtrend:
You can adjust the Moving Average period to whatever fits your trading strategy on Pocket Option. It is also quite common to use 2 moving averages together, one of a shorter period than the other, and interpret their cross-over points as trading signals.
There are many different techniques traders use on Pocket Option in an attempt to anticipate where the price will move next and now hopefully you have familiarized yourself with some of them. But it is important to remember that markets are extremely volatile and their direction can change within a matter of seconds. There is no single solution to this issue other than continuing with the learning process, practicing your strategies, and analyzing performance to see what works best. Do not forget to practice on a Demo account sufficiently to understand various financial instruments, trading strategies, and analytical methods.
Best of luck and enjoy trading on Pocket Option!
Risk Warning: The trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. You should never trade money that you cannot afford to lose.