Why You Should Be Studying the Historical Trading Charts?
The Geek Says…. Binary Options Traders, Study Your Charts!
I know that you have already read and learned about price patterns, technical indicators and how to apply them to your charts. What I am here today to do is inform you that you should spend some time studying your historical charts. Maybe even more time than you spend looking at the current charts. What’s the difference you might ask? Nothing really, except perspective. The current charts are the ones you use to get your signals. These are usually lower time frames, include only a few days or few hours of information and lack the proper perspective to make the really big trading decisions. The historical chart is more than what is happening now, it is everything that happened to an asset over the course of its existence. This could mean years, if not decades, of data and represents the underlying market in which you trades are being made. Failing to take them into account is an easy mistake to make and one that often keeps newbies from realizing profits they would otherwise have made.
Mob mentality and its study is a well known subset of the social sciences. It describes how people are influenced by their peers to adopt certain behaviors, follow trends, and/or purchase items. Examples of the herd mentality include stock market trends, superstition and fashion. It is in fact the very basis of technical analysis and what it is we are studying when we look at our charts. When the market is bullish prices rally, when the market is bearish prices decline, when the market is unsure prices consolidate and when the market changes its mind prices reverse. The thing to remember is that the mob is dumb and will repeat itself even though the individual participants are aware of this fact. It is this repeatability we are looking for when studying our charts and waiting for signals.
When I say that the market is dumb I’m not talking about the individual market participants like you and me, we’re smart. We know how to read the market and stand above it. The market itself though is made up of everyone from the rankest gambler to the most savvy speculator and as such is subject to mob mentality. Conflicting sentiments swirling through the market affect traders on a group level and influence their day to day movements. These swirls are represented on the charts and visible as price action. The key for us traders to remember is that the dumb mob will do the same things over and over again and this will be repeated on the charts through price patterns. These price patterns and their repeatability is why the market is so predictable and what traders are hoping to capitalize on. In order for you to stand above what is happening “in the moment” you must know your history or you will be doomed to repeat it too.
Know Your Market To Control Risk
Using past price action to predict support, resistance and future targets is the technical aspect of risk management. You can control your risk in one way with money management and position sizing; this limits the amount of your trades and controls how much you are allowed to lose. Studying historical charts limits your risk by helping you to weed out potentially bad trades, to pinpoint major turnings in the market and to predict targets. You do this by identifying important price levels and it doesn’t matter how far back they go. In fact, it has been my experience that the longer a potential area of support or resistance has existed the stronger it is likely to be. When a rally approaches a long term level of resistance it is a good time to sit back and wait to see if the resistance will hold, or if it will reverse the market.
Its likely you are already using historical charts and don’t even know it. Multiple time frame analysis is a popular form of market analysis and one that we here at BOTs talk a lot about. It is a top down approach based on historical data that uses the long term to establish trading parameters in the near term. This could be as simple as identifying past support and resistance or as complex as using longer term trends dictate near term trading direction.
The problem that binary traders face is that finding good charts is hard. There aren’t too many places with really good free charts. As I’ve mentioned, the charts offered by most brokers really suck so you may have to seek your charts elsewhere. MT4 is one place to find historical data but even the historical chart tool it has its limitations. My personal choice is Java Charts and it just so happens that you can get them at Binary.com. Regardless of your source I hope that by now you realize the importance of using historical charts as part of your daily routine. They provide perspective on the market, a foundation for current trading and targets for potential reversals.