ALTHOUGH more than 80 per cent of regular spread betters use technical analysis when they are making their trading decisions, scouring the charts in search of patterns that might indicate an imminent breakout or a trend reversal can take hours.
And that assumes that you have managed to learn all the chart patterns – of which there are many variations – and are able to recognise them immediately. Spread betters short on time or patience will therefore welcome IG Index’s new technical analysis offering, which is incorporated into its trading platform and uses software developed for the foreign exchange markets, whose traders rely more heavily on technicals.
Using Autochartist’s pattern recognition software, spread betters can scan selected equity and indices markets for both recently completed and emerging pattern formations. This can flag up key trading opportunities for spread betters that they might have missed through all the noise in the markets.
As David Jones, chief market strategist at IG Index, points out: “It takes the legwork out of technical analysis and is a way of scanning markets very quickly. It also highlights opportunities in markets that you might not have considered.”
The software will provide you with a list of patterns in different markets and also gives you an insight into the quality or strength of the pattern. To do this it measures the quality of the trend preceding the pattern formation, its uniformity and its clarity. For patterns that are completed, it also looks at the decisiveness with which the price broke through the support or resistance line and the associated volume. At a glance you can see how strong a pattern is and factor this into your trading decision.
However, Jones warns that chart pattern recognition is not the Holy Grail. “The decision to buy or sell is still down to the individual,” he says.
Although Autochartist has been available to forex traders for some time through providers such as GFT and Forex.com, IG Index is the first to offer traders this capability for asset classes besides foreign exchange. IG Index is also planning to extend the software to some of its larger and most frequently traded commodity markets such as oil and gold.
Technical analysis is based essentially on mass-market psychology, says Jones, which makes it ideal for trading the biggest and most liquid stocks and indices.
With technical analysis becoming more mainstream, it is only a matter of time before other firms follow IG’s lead and offer similar software to their clients.
Technicals | Chart Patterns
Head and shoulders – a standard reversal pattern, which consists of three spikes associated with declining volume.
Wedges – a sideways trading pattern. Falling wedges indicate temporary interruptions of upward price rallies while rising wedges indicate interruptions of a falling price trend.
Triangles – another consolidation pattern. A breakout (which usually occurs about two-thirds of the way through) is seen as bullish or bearish depending on direction.