Michael van Dulken is Head of Research at Accendo Markets, which specialises in the delivery of a highly personalised trading service to the UK marketplace, with an emphasis on human contact and the awareness that not all traders are technologically savvy.
Michael is responsible for the large and varied output of research publications that Accendo delivers daily to its clients’ in-boxes, which includes the use of expert technical analysis. Here, he talks to us about why traders should be considering technical analysis in the first place.
Armchair Trader: Michael, what is technical analysis, and why should traders consider using it?
Michael van Dulken: Technical analysis is the study of past trading activity with the aim of forecasting future direction. This is possible via identification of signals given out by the price, volume and an array of secondary indicators, which, together, help display the underlying psychology of market participants and ultimately the trend of the price. Not everyone makes use of technical analysis, but it is becoming increasingly widely referred to in the short-term trading world of spread betting and CFDs.
AT: It sounds useful for professional traders, but is this something beginners or retail traders should be using?
MvD: Technical analysis can be, and is, used by everyone from the complete novice right through to the market professional. While the latter may use complicated software, they will both nonetheless respect basics, such as identifying prior highs and lows to help decide where one might encounter support or resistance, which many novices use without even realising.
Technical analysts believe that all the information that could affect a price has already been discounted into the price by the markets. Barring any ‘new’ news the price activity therefore displays the psychology and appetite of buyers and sellers at different price levels. It can, thus, be worth using charts to try to identify where changes in trend might occur before they happen. It is not about forecasting per se, but deciding when the market might do something so as to be prepared to act on it early. Some traders rely on nothing but charts to make their decisions, but others find them useful to supplement their existing strategy.
AT: What are the most popular forms of technical analysis?
There are several, and obviously you don’t need to make use of all of them – that can lead to a very confusing chart.
At the end of the day it comes down to personal preference, what works for you and what doesn’t. Individual technical indicators should never be relied upon in isolation for trading decisions, however strong the signal may be. Ultimately they are one of many indicators, many of which could be pointing the other way. Always look at other indicators to assist with the final decision. Lastly, the current trend should always be respected; pre-empting a move can prove costly.
Trendlines over highs and lows help in highlighting trends. Rising or falling? These can help in identifying future support and or resistance.
The moving average (or MA as it is often referred to) tracks the average price over a period of time, for example 50 days or 200 days. This aids in monitoring the underlying trend and can help to spot when the trend is changing; when the MAs cross, or when the price crosses the MA.
Many analysts now use Japanese candlestick charts rather than standard line graphs, as the latter only shows each period’s closing prices. Candlesticks allow us to see the each period’s range: high and low, and whether that period is showing a gain or loss versus the prior period. Periods can be set for anything from one minute (for two days’ worth of data), one hour (for several months of data) up to one month (for several decades). As mentioned earlier, whichever you use depends on the time-frame you are trading in, and what you can look at depends on your charting package.
Many secondary indicators (derivatives of price) can also be used to identify things such as rising or falling momentum, or when a price is overbought or oversold. One of these is Bollinger Bands;
Bollinger bands are widely used, comprising a pair of lines above and below the moving average which track how high or low the price is compared to previous performance. It is an extra layer of analysis on top of the moving average. These extra lines are still averages in their own right, but they help you to assess when the current price is approaching a relative high point or low point depending on how close it is to one of the bands.
AT: What sort of time frame should traders use?
This depends on the individual and their trading timeframe. If you are looking to take a position with a view to profiting from a long-term move, a one week graph is unlikely to be of any help. Likewise, a five year graph is not going to display the short-term activity that a day trader will be concentrating on to make his decisions.
AT: What sort of markets can you use technical analysis with?
Technical analysis can be used to analyse anything which can have its price activity (equities, indices, commodities, FX, bonds etc) displayed in a graphical format. Its gain in popularity over the years has seen it increasingly adopted by market participants across all asset classes.
AT: Where can a beginner go to find out more?
Many firms offer free courses on charting, and you can also pay for professional charting courses. There is already a wide body of literature available on the topic, both in printed form and via the web. At Accendo markets we provide our clients with regular briefings on current trends in technical analysis and offer one-to-one sessions if required. The important thing to remember is not to become too caught up in your charts – it is possible to overanalyze the market, looking at too many things, and to not actually get any trading done at all!
You can follow Michael van Dulken on twitter @MikeVanDulken for market insight and analysis