Technical Analysis For Deriv Traders

Let’s discuss technical analysis and how it applies to different markets, particularly with Deriv’s synthetic indices.

Technical analysis isn’t market-specific – it’s a versatile toolkit that works whether you’re trading forex, stocks, or even the more niche synthetic indices on Deriv.

What’s interesting about these synthetic indices is their pure technical nature. Unlike traditional markets, they’re not swayed by geopolitical events or economic releases, making them a purist’s playground for technical analysis.

Despite their unique characteristics, Deriv synthetics still respect core technical principles.

You’ll find all the usual suspects here—support and resistance levels, supply and demand, breakout patterns, and fair value gaps—all in play.

It’s like trading a traditional market but with the noise filtered out.

However, let’s not kid ourselves. Mastering the technical tools is just the foundation.

The real edge comes from understanding market psychology and structure. It’s about recognizing how these technical patterns translate into trader behavior and market dynamics.

Bottom line: Whether you’re charting traditional currencies or a Deriv synthetic, the technical framework remains consistent.

But it’s your grasp of market psychology and market structure that’ll ultimately determine your success. Are you just reading the charts, or are you reading the market?

TECHNICAL ANALYSIS FOR DERIV TRADERS

Technical analysis for Deriv trading mirrors forex strategies. Key concepts include:

– Supply and demand zones

– Support and resistance levels

– Break of structure

These concepts help traders identify potential entry and exit points. While the markets differ, the analytical approach remains consistent.

Mastering these techniques can give Deriv traders an edge, just like in forex.

Remember, it’s not just about spotting patterns, but understanding their implications for price action.

4 TYPES OF TECHNICAL INDICATORS 

As a trader, you are familiar with using technical indicators, from the RSI to the MA and CCI. Before we go straight into the four types of technical indicators, we need to first define what technical indicators are.

Technical indicators are tools used by technical analysis traders to interpret market behavior.

These indicators analyze past market data, including price, volume, and open interest, to generate heuristic or pattern-based signals.

Traders use these signals to predict future price movements and make informed decisions about market direction.

By transforming historical data into mathematical patterns, technical indicators help traders identify trends, gauge momentum, and determine potential entry or exit points in the market.

Now let’s talk about the four types of technical indicators:

TREND INDICATOR:

Trend indicators are analytical tools in technical analysis that objectively measure a market’s directional movement.

These indicators compare current price levels to historical averages, helping traders identify whether an asset is in an upward, downward, or sideways trend.

By quantifying price momentum and direction, trend indicators assist in spotting potential breakouts, confirming established trends, and gauging overall market sentiment.

They provide a systematic approach to assessing price behavior, enabling traders to make more informed decisions about entering or exiting positions based on the prevailing market direction.

Examples of trend indicators:

Moving averages

Moving averages are trend indicators that calculate an asset’s average price over a defined timeframe. They come in various forms: simple, exponential, smoothed, and linear weighted.

By smoothing out short-term price fluctuations, moving averages help clarify the overall market direction, making it easier for traders to identify and follow trends.

MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD):

MACD indicates changes in the direction, momentum, strength, and duration of a trend in the asset price. The MACD consists of three elements

MACD line, signal line, and Histogram.

PARABOLIC SAR:

Parabolic SAR is used to identify potential market reversals in the market and to find an ideal entry and exit points.

VOLATILITY INDICATOR:

Volatility technical indicators quantify the intensity of price fluctuations, irrespective of market direction. These tools measure how rapidly prices change, providing insights into market stability and potential risk levels.

Examples of Volatility indicators:

Average true range:

The Average True Range (ATR) is a tool that helps measure how much an asset’s price moves over a certain period.

It’s used to determine price volatility and to make decisions about where to place stop-loss orders and how large a position should be.

Standard Deviation:

Standard Deviation is a tool used to measure how much an asset’s returns vary from its average return over a certain period.

It helps assess the level of risk and interpret price movements.

Bollinger bands:

Bollinger Bands is a technical tool used to identify when an asset might break out of a stable price range, helping traders assess volatility and predict potential price movements.

They compare the current price to past prices to measure how high or low it is.

MOMENTUM INDICATOR

Momentum indicators are specialized technical tools that assess the velocity of price changes by comparing current closing prices to historical data.

These indicators gauge whether an asset is experiencing upward or downward momentum and can signal potentially overbought or oversold conditions based on past price behavior.

While useful, momentum indicators are often most effective when combined with other analytical tools, such as trend indicators, to provide a more comprehensive market analysis and guide trading decisions.

Examples of Momentum indicators:

Commodity channel index CCI:

The Commodity Channel Index (CCI) is a versatile technical indicator that helps traders assess market conditions.

It measures the deviation of an asset’s price from its statistical average, signaling potential trend reversals, price extremes, and momentum strength.

The CCI typically oscillates between -100 and +100, with readings above +100 suggesting overbought conditions and those below -100 indicating oversold conditions.

This tool aids in timing market entries and exits by identifying possible price turning points.

Stochastic Oscillator :

The Stochastic Oscillator is a momentum indicator that compares an asset’s closing price to its price range over a specified period.

By measuring the relationship between current price levels and recent highs and lows, this tool helps traders gauge momentum and identify potential overbought or oversold conditions.

The Stochastic Oscillator’s oscillations between 0 and 100 can signal possible trend exhaustion or impending reversals, aiding in the timing of market entries and exits.

Relative strength index (RSI) :

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements.

It evaluates market conditions by comparing the magnitude of recent gains to recent losses, typically over a 14-period timeframe.

The RSI oscillates between 0 and 100; with readings above 70 generally considered overbought and below 30 oversold.

This indicator helps traders identify potential price reversals and assess the strength of current market trends, making it a valuable tool for timing market entries and exits.

VOLUME INDICATOR

Volume indicators are technical analysis tools that assess trend strength by quantifying trading activity.

These indicators analyze the number of shares or contracts exchanged over a given period, providing insights into market participation and conviction behind price movements.

By correlating volume with price action, these tools help traders gauge the sustainability of trends and identify potential reversals or breakouts.

Examples of Volume indicator

On Balance Volume (OBV):

On Balance Volume (OBV) is a cumulative volume indicator that quantifies buying and selling pressure.

It tracks the flow of volume in relation to price changes, adding the day’s volume when prices close higher and subtracting it when prices close lower.

This running total creates a line that reflects the balance between bullish and bearish volume.

By comparing OBV trends to price movements, traders can assess the strength of market trends and potentially anticipate price reversals or confirmations.

Accumulation and distribution indicator (A/B):

The Accumulation/Distribution (A/D) indicator assesses buying and selling pressure in an asset. It combines price and volume data to measure the flow of money into or out of a security.

By tracking the relationship between closing prices and trading ranges, alongside volume, the A/D line helps traders identify potential divergences between price trends and underlying buying or selling activity.

This can signal possible trend reversals or continuations, aiding in decision-making for entries, exits, and overall market sentiment analysis.

Money Flow Index (MFI):

The Money Flow Index is a momentum oscillator that incorporates both price and volume data to assess buying and selling pressure in an asset.

Often referred to as a volume-weighted RSI, the MFI provides a more comprehensive view of market dynamics by considering the amount of money flowing in and out of a security.

It typically uses a 14-period calculation that evaluates the relationship between positive and negative money flow.

The resulting indicator oscillates between 0 and 100, with extreme values potentially signaling overbought or oversold conditions and helping traders identify potential trend reversals or continuations.

WHAT ARE TRADING TECHNICAL INDICATORS USED FOR?

Technical indicators are used by traders and analysts for several key purposes:

1. To confirm market entry: Indicators help validate trading decisions by providing additional evidence for entering a position. They can signal when a trend is strong enough to warrant action or when a reversal is likely to occur, giving traders more confidence in their entry points.

2. To predict market direction: By analyzing historical price and volume data, indicators aim to forecast potential future price movements. They can highlight trends, momentum shifts, or potential reversals, allowing traders to anticipate and position themselves for upcoming market moves.

3. To give alerts for potential market opportunities: Many indicators are designed to signal when an asset may be overbought or oversold, or when it’s approaching significant support or resistance levels. These alerts can help traders identify potential trading opportunities before they fully develop.

DERIV LEVERAGE

At the time of writing this post, Deriv has recently made changes to its leverage for synthetic index, you can find full information on the official Deriv blog post.

HOW DO YOU ANALYSE A DERIV MARKET?

Analysis of Deriv markets closely parallels that of traditional forex markets. Key technical analysis concepts to focus on include:

1. Break of Structure (BOS): Identify significant price levels where previous trends are invalidated, potentially signaling a shift in market direction.

2. Order Blocks: Locate areas of high trading activity that may indicate institutional order placement, often serving as future support or resistance.

3. Support and Resistance: Recognize critical price levels where buying or selling pressure has historically been strong, and monitor for potential breakouts or rejections.

4. Supply and Demand Zones: Identify areas on the chart where significant imbalances between buyers and sellers occur, often leading to price reversals or continuations.

5. Price Action: Analyze candlestick patterns and chart formations to gain insight into market sentiment and potential future movements.

6. Market Structure: Evaluate higher timeframes to understand the overall trend and market context before zooming in on shorter timeframes for entry and exit points.

7. Liquidity: Look for areas of clustered stop losses or take profits, as price often gravitates towards these levels.

DOES TECHNICAL ANALYSIS WORK ON INDICES?

Yes, technical analysis can be effectively applied to indices, just as it is used for currencies and other financial instruments.

The core principles of technical analysis are universally applicable across various markets, including stock indices.

Key concepts in technical analysis that work for indices include:

1. Supply and demand: These fundamental forces drive price movements in indices, creating trends and reversals.

2. Support and resistance: Indices often respect key price levels where buying or selling pressure is expected to increase.

3. Fair value gaps: These areas of price disparity can be identified and traded in indices as well.

4. Chart patterns and formations: The same patterns observed in other markets (e.g., head and shoulders, double tops/bottoms) can be found in index charts.

5. Market Psychology: Understanding the collective behavior of market participants is crucial when analyzing indices.

Traders who develop a strong grasp of market psychology often gain an advantage over those who rely solely on technical indicators.

This is because technical analysis is as much about interpreting human behavior as it is about reading charts and indicators.

By applying these concepts to indices, traders can potentially identify trends, anticipate reversals, and make more informed trading decisions.

However, it’s important to note that no analytical method is foolproof, and technical analysis should be used in conjunction with other forms of analysis and risk management strategies.

HOW DO I BECOME A SUCCESSFUL DERIV TRADER?

To become a successful Deriv trader, particularly focusing on synthetic indices like Boom and Crash or Volatility Index, you should consider the following key aspects:

1. Understand market psychology and structure: Gain insight into how these synthetic markets behave and the factors that influence their movements.

2. Develop a working trading strategy: Create or adopt a strategy that suits your trading style and the specific characteristics of Deriv synthetic indices.

3. Apply strict risk management: This is crucial for long-term success in any trading endeavor, especially with potentially volatile synthetic indices.

4. Focus on a few assets: Instead of spreading yourself thin, concentrate on mastering a select few Deriv products.

5. Always set stop loss and take profit: These tools are essential for managing risk and securing profits in the fast-moving synthetic markets.

6. Practice consistently: Regular trading and analysis will help you refine your skills and strategy over time.

7. Stay informed: Keep up with any changes or updates to the Deriv platform and its synthetic indices.

8. Monitor and adjust: Regularly review your performance and be willing to adjust your approach as needed.

Remember, success in trading Deriv synthetic indices requires patience, discipline, and continuous learning.

It’s important to start with a solid understanding of the products and to trade responsibly, always being aware of the high-risk nature of these financial instruments.

CONCLUSION

In conclusion, it’s crucial to understand that relying solely on technical indicators is not the key to trading success.

If it were that simple, the forex market would be teeming with consistently profitable traders. However, reality paints a different picture.

Through years of experience in the trading arena, I’ve come to recognize that indicators should be viewed as complementary tools rather than primary decision-makers.

The foundation of a successful trading career lies in a deep understanding of market psychology and structure. These fundamental aspects should form the cornerstone of your trading strategy.

Once you’ve mastered these core concepts, technical indicators can then be integrated as valuable supplementary tools.

They can help confirm your analysis, provide additional insights, and potentially improve your timing.

This holistic approach – prioritizing market understanding while judiciously using indicators – is the path to not only achieving success in forex trading but also maintaining it over the long term.

By adopting this perspective, you position yourself to navigate the complex world of currency or synthetic markets more effectively, increasing your chances of sustained profitability.