The Importance of Technical Analysis in Forex and CFDs Investors have thousands of opportunities to trade assets online, and to become successful investors traders must identify trends and be able to predict the future value of financial assets. The importance of Forex and CFD technical analysis is crucial to help streamline these decisions and determine the optimal trades that meet the overall goals. In fact, technical analysis is especially important in trading Forex to be able to forecast movements of the market, given its high volatility.
What is Technical Analysis?
Technical analysis studies the behavior of the market, primarily through the use of graphic tools, market indicators and reports in order to predict future trends in the price of an asset. The analysis is based on three basic premises; these assumptions are:
The price reflects the overall stability of an asset; there are many elements that affect the market and these are reflected in the share price. Mainly supply and demand is causing this rise or fall in prices. As a technical analyst, you should not care about the factors causing changes, but limit your analysis to the consequences
Prices move in trends; this is pretty straightforward; prices always move in trends, upward and downward, depending on the circumstances that occur in each moment in the markets. The purpose of technical analysis is to define the trends, and prepare to start your trades in that direction.
History repeats itself; certain trends in the markets tend to reoccur again and again. It really comes in handy to perform comparisons and examine the past behavior of an asset before deciding what to do with your investment, depending on that asset’s history.
With this style of analysis, a trader will use market trends to predict price movements of an asset in the future. The purpose of this technique is to estimate the present value of the asset, but to determine patterns in the fluctuation of prices, which helps predict future activity. Understanding these models allows traders to identify potential changes in the value of assets, giving them a good indication of the upward or downward trend in the price of the asset. It’s also important to note that technical analysis is performed the same no matter what underlying asset you are looking at.
Utilizing Technical Indicators
Technical indicators are defined by different mathematical variables and are distinguished into four families based on the information that is desired. They allow you to view real-time changes in the price of a given asset and assess market psychology related asset.
Trend indicators: These types of indicators allow the trader to see at-a-glance the tendency of a real-time asset.
The momentum indicators: These indicators are powerful tools to help appreciate the strength of a current trend.
The supports and resistances: These indicators are calculated directly from the highest levels and lower active level and generally allow rules to define the target price.
While currency in one form or another has been around for millennium, up until the 21st century it has always been in a physical form. That form may be coins, bars, or even paper currency, but there has always been a physical representation of the currency we use in our daily life to buy goods and services. Everything changed in 2009, when Bitcoin was released as open source software that is used to create a digital currency. A digital currency, also known as cryptocurrency, is created through the use of specialized software and is stored only in a digital form on computers and servers throughout the world. Since then many other digital currencies have come on the scene, with even more appearing on a monthly basis. Yet Bitcoin is still the king when it comes to digital currencies – at least for the time being. Read on to learn more of the history behind digital currencies and the details behind some of the most popular digital currencies.
The idea of digital currency actually came about as far back as 1982 in a research paper published by cryptographer David Chaum. He also formed the very first digital cash company called Digicash in 1990, but it was an idea ahead of its time and the company filed for bankruptcy in 1998.
How it All Started
The modern age of digital currencies began when Bitcoin was released as the very first decentralized digital currency. Until the release of Bitcoin, any digital currencies had been centralized, but Bitcoin changed all that. Rather than being controlled by a single source or company, Bitcoin is created and stored in a peer-to-peer networking system and relies on what is supposed to be secure cryptography for its creation through the use of digital signatures known as blockchains.
Although there have been concerns put forward regarding the creation and use of digital currencies by illegal and terrorist organizations, the movement has more recently been gaining additional support and there are now several countries and global companies who are exploring the use of blockchain technology and cryptocurrencies for use in a variety of applications.
Bitcoin – As mentioned above, Bitcoin was the first decentralized digital currency and the very first Bitcoin was mined, or created, in 2009. The actual identity of the creator of Bitcoin is unknown, but it was released under the name Satoshi Nakamoto, which is a pseudonym for the programmer or group of programmers who introduced Bitcoins. The Bitcoin system is a peer-to-peer decentralized system, with transactions occurring directly between individuals.
New Bitcoins are created through the process of mining, in which distributed computers around the world solve each block in the blockchain system. As a block is solved a new Bitcoin is added. The system adjusts the difficulty of solving blocks every 2016 blocks, making each additional Bitcoin more difficult to be mined or created. In this way Bitcoin has an artificial scarcity that has helped increase the price of Bitcoin dramatically since its inception. There will only ever be 21 million Bitcoins created, which is expected to be accomplished in 2140 or thereabouts.
The price of Bitcoin has increased dramatically since its inception, but it is also considered to be extremely volatile. In 2011 the value of one Bitcoin dropped as low as $0.30, but as of mid-2017 the value of one Bitcoin is roughly $2,400. On 13 August 2017, Bitcoin hit an all-time high of $4,200. It has been estimated that Bitcoin’s price is 7 times as volatile as the price of gold, 8 times as volatile as the S&P 500 Index and 18 times greater than the U.S. dollar.
Ethereum–Ethereum is another decentralized digital currency, but is also a computing platform developed for its scripting functionality. It is quite new, having gone live on July 30, 2015 with a value of $1 per Ether coin. The value of Ethereum has recently skyrocketed, nearly hitting $400 on June 14, 2017, but has since pulled back and trades around $240 per Ethereum coin as of mid-July 2017.
One interesting fact about Ethereum is that many corporations, financial institutions and even governments have begun developing their own systems and programs based on the Ethereum protocol. This could be very positive for the currency, as broad adoption would be sure to increase the value of Ethereum. Another factor of note is that Ethereum is currently seeing double the processed transactions when compared with Bitcoin.
Unlike Bitcoin, there are no plans to cap the number of Ethereum, however there are plans in place to reduce the growth (and hence inflation) of Ethereum between 0.5% and 2.0% by changing the verification of new Ethereum blocks to a proof of stake rather than proof of work.
Anyone interested in digital currency trading should certainly keep their eye on Ethereum as it promises to be vital to the growth of the digital currency economy.
Ripple – Ripplewith a market capitalization of more than $6.5 billion, is currently the third largest digital currency by market cap, eclipsed only by Bitcoin and Ethereum. That by itself should be enough for traders to keep their eye on price movements of the Ripple cryptocurrency. With more than 38 billion coins, called Ripples, in existence, the value of the Ripple is quite lower when compared to other major digital currencies, topping out around $0.42 per Ripple in May 2017 and trading at just $0.238 per Ripple in mid-July 2017.
The original Ripple protocol was developed as far back as 2004, and was released as Ripplepay.com in 2005 as a financial service to provide secure payment options to members of an online community via a global network. The current version of Ripple was developed in 2012 and was released in 2013.
Ripple differs in that it is a real-time settlement system, currency exchange and remittance network. The Ripple network supports tokens that represent fiat currencies, other cryptocurrencies, commodities, and even frequent flyer miles or mobile plan minutes. It is increasingly being adopted by banks as they feel it has a number of advantages over cryptocurrencies like Bitcoin, including price . Large banks are using the Ripple protocol include UBS, Santander, and most recently SCB in Thailand.
Because of its ability to conduct transaction free cross-currency exchanges, Ripple bears watching by traders and investors. It can be especially useful as a bridge when there is no market for a specific currency in that it will seamlessly convert any asset to the desired payment currency. This could make the Ripple a very valuable digital currency in the near future.
Dash–Dash has undergone several changes in its lifetime, and was once known as Darkcoin and also Xcoin. It should also not be confused with a similar digital currency known as Dashcoin. Dash is similar to Bitcoin in some respects, but it has been engineered to use two-tier architecture in its network to provide additional features and added safety. Users of the Dash cryptocurrency enjoy both private and instant transactions. Dash is also the first decentralized autonomous organization, with the first Dash currency created on January 18, 2014.
Dash has grown to a market capitalization of roughly $1.5 billion and has 7.42 million coins currently in circulation. With a Dash coin currently worth $193.46 it is off a recent high of $209.77, but appears to be trending higher in the long term. There is a daily turnover for Dash of over $100 million, making it a popular alternative to Bitcoin and other digital currencies.
Traders who are interested in Dash should be aware that this digital currency has one of the most active communities of any altcoin (the term altcoin is used to refer to any of the digital currencies other than Bitcoin). Activity on the BitcoinTalk forum has reached more than 6400 pages, 133k replies, 7.9M reads. This active community should certainly be one source of news and information that is constantly monitored by traders of Dash.
Litecoin – This digital currency was created as a fork of Bitcoin, and as such is very close in nature to the original digital currency. There are some differences however, such as almost zero payment cost and payment transactions occurring approximately four times faster than Bitcoin. Litecoin was created in October 2011 by a former Google employee named Charlie Lee. Litecoin has been a success since its inception and currently has a $2.5 billion market cap, with 51.9 million coins worth around $5 each in circulation. Litecoin hit a high of $55.46 per coin on July 5, 2017 before pulling back, although the overall trend is higher for the digital currency at this time.
Litecoin processes blocks about four times faster than Bitcoin, and is set to release a total of 84 million Litecoins, again four times the number planned to be released for Bitcoin. This will give Litecoin an artificial scarcity that should keep the price of Litecoin trending higher as it becomes increasingly difficult to mine the remaining Litecoins.
As one of the major digital currencies in use, Litecoin has a daily turnover of more than $130 million, traders should certainly keep an eye on Litecoin to monitor price movements and changes in market sentiment that could provide trading opportunities.
The Cryptocurrency Market
Even though the cryptocurrency market is just 8 years old, already it sees trading volumes exceeding $100 billion as of June 2017. All of that trading comes from over 800 different digital currencies, with more entering the market every month. Needless to say, there is vast opportunity here for those willing to accept the risk of jumping into new markets. Because of the volatile and rapidly changing nature of the cryptocurrency markets, prospective traders should do their own research regarding current trading volumes, active digital currencies, and opportunities in the markets.
Digital currency investors may benefit from the fact that these currencies are not tied to any central bank or single country. This means they can be traded with ease 24 hours a day, 7 days a week, and 365 days a year. One caution for traders who are new to the cryptocurrency market is that these digital currencies move based on different factors than you are used to with traditional currencies. Rather than reacting to central bank policy and the economic strength of a given country, these currencies react to cyber-events such as hacking, or the release of new technologies. And because the market capitalization of most digital currencies is quite small they can also be influenced by individual investors.
Imagine buying a $100 million USD position. Certainly it’s a large position, but it isn’t large enough to be noticeable in the billions of dollars of daily USD transactions. This isn’t true for any of the digital currencies. A $100 million position would be larger than the daily trading volume for all but the largest, and such a position would likely have a huge impact on the pricing and volatility of the underlying digital currency.
The cryptocurrency market is growing rapidly, but is still small compared to the global currency market. This factor can be attractive to traders as they are on the forefront of trading in these new markets. The only important factor to keep in mind is to remember the risks associated with trading in new and volatile markets, and understand that losses can come just as fast as profits or even quicker.
The above figures are not up to date. Please conduct your own research.
Trading Cryptocurrencies with Elite Mining
As a leading online broker, Elite Mining was one of the first to offer trading CFDs on cryptocurrencies. With five of the most popular digital currencies currently available for trading as CFDs, we are always looking for the latest popular currency so that we can make a CFD of it available to our traders. Our education center will help take the mystery from cryptocurrencies so you can trade CFDs with greater confidence. And with our easy to use trading platform you’ll soon find it more accessible than ever to trade CFDs on your favorite underlying digital currency online.