Technical analysis can be used to identify asset class characteristics. Traders can utilize technical analysis to spot trading opportunities and manage positions, and these principles can be used across a range of different asset types.
The core principles of technical analysis when it comes to asset class characteristics can be applied to any market and can be used when trading stocks, indices, forex, crypto or commodities.
Using technical indicators to establish conditions in different markets will allow you to find those that suit your approach, while also allowing you to monitor the changes in conditions over time.
How to identify asset class characteristics
Price charts can be used to identify the prices of digital assets at a particular time. They also contain additional useful data such as the current market realities and other insights including the market’s future predictions.
Utilizing the data can offer insights into the conditions of different asset classes. For instance, price volatility is a crucial technical measure, and it is important to enter the market at a time when price movements suit your risk tolerance and trading strategy.
Changes to trade volumes should also be taken into consideration. Increased trading activity can bring about price moves and better trading opportunities. Ultimately, there will be an influx of new traders and the market can show a trend.
Tip: Trading signals that appear during periods of higher trade volumes are typically considered to be stronger.
How does the time-of-day impact trading?
The time of day heavily impacts trading. For example, the opening and closing stages of a trading session are usually the busiest periods of the day. When an exchange opens, investors often rush to enter or exit positions, based on the events that happened overnight.
On the other hand, volumes tend to pick up at the end of the trading session as investors take the opportunity to adjust positions before the close of the day.
In the Tesla Inc. chart below, you can see how trade volumes spike at different points in the day trading session, typically correlating with significant price moves.
Past performance is not an indication of future results
Source: eToro
How does time-of-day impact different strategies?
A common systematic trading strategy that has been historically effective is to be more active during the opening and closing periods of a market. During these periods, there is an increased “flow” of traders, each with different investment strategies designed for when trading volumes are higher.
Tip: Major news announcements can be announced at any time of day and can trigger intraday spikes in volatility.
Day traders typically only hold positions for a single day, so they are more likely to open positions when exchanges start the day and close them before the final bell.
Investors with a buy-and-hold approach might prefer to trade during quieter periods. During these periods, they can trade in and out of positions with less risk of price declines as they do so.
Using technical analysis to understand how different markets trade
A market that is experiencing greater price fluctuations must be approached very differently from one in which the prices are more stable.The example below shows that it is possible to access data that calculates and reports volatility. With a basic charting analysis, you can immediately determine whether a crypto (such as Dogecoin below) is more likely to experience increased volatility compared to a stock (such as Unilever).
| 12-month price chart for Dogecoin (2022-2023) |
Past performance is not an indication of future results
Source: eToro
Tip: Technical indicators can outline whether a market is trending or ranging, which should influence your strategy selection.
In the chart below, you can see if Unilever is more likely to experience increased volatility, when compared to Dogecoin.
| 12-month price chart for Unilever (2022-2023) |
Past performance is not an indication of future results
Source: eToro
Comparing conditions across different markets is useful for a broader insight into the digital asset world. However, looking into how a single market changes over time can also be beneficial.
For example, the stock market has its off-season in the summer. During this period, stocks record lower volatility as key decision makers at big investment companies might be on vacation. This data can guide a stock investor’s decisions during the summer months.
However, economic cycles should also be considered as price guides over a specific period.
Tip: Some traders look for markets with higher price volatility because their strategies are prepared for greater degrees of risk return.
Conditions in markets can also change over shorter time scales. The forex market can be traded on a 24/5 basis, but because of time-zone differences, there are peaks in activity and price volatility at certain times of the day. For example, the Eurodollar currency market has historically seen volumes pick up when European and US exchanges are both open at the same time.
In the EURUSD chart below, it is possible to see that the Bollinger Bands widen at 13:00 in London.
Past performance is not an indication of future results
Source: eToro
Tip: Certain asset classes are closely correlated with others — for example, USD currency pairs and the US equity markets.
Final thoughts
Technical analysis can be used to trade any market or digital asset. It can also help you to identify the markets that best suit your chosen strategy and risk appetite.
Different markets will be experiencing uptrends, downtrends and range-bound trading at the same time, and so one of those trading environments could be an ideal fit for you and your investment goals.
Visit the eToro Academy to learn more about technical analysis and asset classes.
Quiz
FAQs
- How can I measure market sentiment?
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Some instruments can give an insight into market sentiment. For example, the VIX Volatility Index, sometimes referred to as the “Fear and Greed” index, offers a measure of risk appetite among investors and can also be bought and sold to hedge portfolios.
- How can I find out about upcoming news?
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An Economic Calendar contains information on upcoming announcements by various organizations such as central banks and corporations. Calendars can be filtered to personal preference so that they provide information relating to the markets you are trading. This makes it easier to keep up to date with events.
- What are the most important news announcements to look out for?
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This will depend on the market you are trading, but some economic announcements, such as the US Non-Farm Payroll report, have wide-ranging effects. This report is released on the first Friday of every month and details the unemployment situation in the world’s largest and most important economy.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.