Importance Of Support And Resistance In Binary Options Trading

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Trading Guide: Support and Resistance Trading with Binary Options

One of the first things many forex traders learn when they start out are the definitions of support and resistance

The support/resistance trading strategy is used for both short and long-term binary trading. With it you take into account historical levels that a certain currency, stock, commodity or index has reached and reversed from.

To be able to understand this strategy, one has to know the definitions of support and resistance. The first is defined as a historical level that a certain price has previously been unable to fall below, or a position that a lot of buyers enter. For resistance levels it’s the opposite – a level that the price reaches, but regularly falls down from, as more traders start selling it.

In order to take advantage of how this style works, there needs to be some knowledge of charts and how to read them. This starts with selecting the most suitable chart type such as Japanese candlesticks, bar, line etc. After this comes the establishiment of previous patterns and occurrences of the price reaching a certain level and then backing off it. These need to be found over a long enough period (for turbo trades this can be looking at 30 minutes or a full hour back and further increases with the longevity of the binary option that is being traded).

There is no preset number of these occurrences that can fully guarantee profitability (just like there is no single trading strategy that guarantees success), this would have to be determined by traders themselves.

After identifying the levels the next most important thing is entering the trades at the correct moment. This would be when the price reaches the respective support or resistance and is believed to be on the verge of reversing, or has already begun doing so.

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Binary options traders have adapted the strategy to turbo options that last several minutes or seconds. They have been popular in slower markets, where timing has an even greater importance as the window of opportunity can last several seconds. This would be between the close of the US stock markets and the open of the Australian one. During this time, binary option brokers still offer currency trading for the most popular pairs, albeit not on the shortest types of options.

Hourly and daily trades are also possible using this strategy. This would almost always fall within the most active hours, as the largest number of testing support and resistance levels happens then. Other factors such as news, announcements and economic data come into play here and traders use them to confirm stronger levels on which they can trade.

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In the above example you can see a recent four-hour chart of USD/CHF with two buying signals and three selling ones, indicating the currency pair was moving in a range for this period – the most suitable ground for support/resistance trading.

The strategy as a whole has to be based on previous research that provides some assurance that the levels will not only hold the current price direction, but also make it reverse. There are no general guarantees that this will happen, as each new situation comes with a multitude of other factors. Regardless, some traders have come to appreciate the relative simplicity the strategy offers when it comes to deciding the timing and direction of their trades.

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Importance Of Support And Resistance In Binary Options Trading

In trading, you will have to master two concepts in order to achieve success. One is fundamental analysis and the other is technical analysis. Fundamental analysis involves the use of economic, financial and other quantitative and qualitative factors in evaluating the price value of an asset. On the other hand, the technical analysis involves the use of the past prices and volumes for forecasting the direction of an asset’s price movement. The terms support and resistance are associated with technical analysis. They indicate the low and high price barriers within which the price of an asset would move during a specified period of time. The aim of this post is to discuss the importance of support and resistance in binary options trading.

Charts used for technical analysis are generated by plotting past prices against volumes. In the charts, the resistance level shows the maximum price value that an asset will not be able to break. The support level indicates the minimum value below which the price of the asset will not fall. These levels have a key role to play in binary options trading as well because it is all about predicting the direction of movement of the price of an underlying asset. If you take the trouble to understand the support and resistance levels and implement it binary options trading, you will be successful in generating more profits. As you analyze the charts, you will be able to identify trends and patterns and more precisely predict the direction of movement of the price of the underlying asset under consideration.

In order to precisely identify the support and resistance price levels of an asset, you need to draw the support and resistance line on the price chart of the asset under consideration. The support line provides indications as to when you can involve in Call or buy trades and the resistance line gives points at which you can involve in Put or sell orders. According to experts from financial markets and those specialized in trading binary options, it is important that you develop expertise in finding out support and resistance price levels using charts if your goal is to become a successful binary options trader.

How to Identify Support and Resistance Price Levels

A study of the price chart of an asset will help you to understand its trend. If there is a continuous drop in the asset’s price, then note down the highest point prior to the start of the downward trend. Each of the upward peaks represents the resistance points. In the same way, identify the support level by determining the lowest point hit by the asset prior to moving up.

In the charts used for technical analysis, the resistance line indicates the level beyond which the price of the asset would not rise. As asset’s price approaches the resistance level, its demand reduces and this prevents further increase in price. Now, all that you have to do keep watching the chart and place a Put trade as the asset’s price trends downwards after hitting the resistance level.

On the other hand, the support line tells you that the asset’s price will not fall beyond that level. As in the case of resistance level, the demand for the asset will increase as its price approaches the support level. Therefore, the best time to place a Call trade is when the asset’s price starts trending upward after hitting the support level.

When trading binary options, it is best to make use of the Candlestick charts in order to clearly identify the support and resistance price levels of an underlying asset. The reason being this chart will help you to easily understand the shadows (the prices beyond resistance and support levels) as the asset’s price tests these levels.

Triangle and Wedge Patterns In Asset Price Charts

The binary options broker with whom you are working would provide you with the charts. The wedge indicates trends in these charts. You should misunderstand the triangle pattern as a wedge. This is because both the patterns indicate different situations. The triangle pattern represents a breakout price movement in the same direction. On the other hand, the wedge pattern provides an indication about the trend in the opposite direction. A wedge is usually formed when the asset’s price ranges between two converging and sloping trend lines (the lower and top lines indicate the support and resistance levels).

A soaring wedge develops when both the lines are moving in the same direction as that of the increasing price line of the asset. This gives you a signal that a price breakout is possible within the wedge in the opposite direction. As a binary options trader, you can purchase a Put option as the asset’s price would decline. On the other hand, a decreasing wedge tells you that the asset’s price would rise and you can buy a Call option. This is to say that understanding the wedge formation when identifying the support and resistance levels enables you to buy right options on the underlying asset.

Some Important Tips When Using Support and Resistance Price Levels to Trade Binary Options

If the asset’s price goes beyond the resistance level, this price may become the support price for the next upward movement.

Typically, the assets test the resistance levels many times.

If the resistance or support level is breached, the strength of the succeeding price movement will be based on the behavior at the time of testing these levels.

It is important that you watch the charts at intervals of 15, 30 or 60 minutes to clearly determine the resistance and support levels so that you can place trades with confidence.

The numbers specifying support and resistance price levels are not accurate values, but estimations. They only provide the guidance needed for trading binary options.

Identify at least two bounces when validating support and resistance levels.

Trend is also important. The asset’s price may remain steady, but the bounces may become weaker and weaker. If this is the situation, do not take risk. The chances of you making winning predictions are low.

In general, avoid trading against the trend or momentum.

Support and Resistance Trading

Support and Resistance trading method. Lines. Levels, Strategies.

What is Support and Resistance?

Supply and Demand! One of the basic characteristics that determines the value of a product, commodity and even a currency, forms an important aspect when it comes to technical analysis of the forex markets. Prices in a currency pair tend to fluctuate when there is an imbalance of supply and demand. In this article, we’ll explain what supply and demand is and thus eventually illustrate the importance of trading with support and resistance and how traders can capitalize on this anomaly in order to take more effective trades.

What is supply and demand?

Supply is when there is an abundance of a product or when there are fewer buyers in a market. This scenario results in prices being reduced.

Demand, is when there is an abundance of buyers or when the availability of the product is much lesser, which tends to raise the value of the product.

Therefore, in forex terminology, when there are a lot of sellers, the price tends to drop and when there are many buyers, the price tends to rise.

Supply and demand, in trading terminology can also be referred to as support and resistance.

What is support in forex? Support is nothing but a level or a zone where there are more buyers than sellers, thus forming a floor and where price tends to rise in value. Resistance, in forex is where there are more sellers thus resulting in a drop in a price.

In simplistic terms, it is ideal to sell at resistance (or supply levels) and to buy at support (demand levels).

Support and resistance form an important aspect of trading the forex markets. They are not constant and continue to change constantly as the market dynamics continue to change. Understanding support and resistance is an important concept in trading and it is essential for the trader to understand these concepts.

Support and resistance levels can assist in various forms of trading, the most common trading systems of which are as follows:

To understand any of the above, we need to first get an idea of how support and resistance levels are depicted in the charts.

In the chart above, notice the highlighted areas depict support and resistance, with the red and green arrows. Take note of the green arrows depicting the support level where price has managed to rally twice.

Support & Resistance – Cheat Sheet

The following points should help the reader understand support and resistance levels in forex.

  • Support level is usually determined as a price zone where prices usually rally when reaching that zone
  • Resistance level is determined as the price zone where prices tend to drop upon reaching that zone
  • Past support levels, when broken can turn to resistance and vice versa
  • Price remembers past support and resistance levels, especially over longer periods of time
  • Round numbers especially form support and resistance levels. These are often referred to as psychological support/resistance levels
  • Price always comes back to test the support or resistance levels
  • It is always best to trade the first test of support or resistance levels

In this next section let’s see how support and resistance levels help in each of the five approaches to trading and also how trading with any of these five approaches can help in improving the odds when taking into consideration the aspect of support and resistance (or supply and demand) in trading the forex markets.

1. Support and Resistance during breakouts

Trading breakouts is an approach when price tends to move within a tight range over an extended period of time. The direction of the breakout, while uncertain can help determine if there are more buyers or sellers. Or in other words, if a support or resistance level is being formed.

The chart below shows how after periods of consolidation or price moving in a tight range, there was a breakout to the downside. During the process, we notice a moment where price tried to break out to the upside but failed. Traders without an understanding of support and resistance would have seen that as a long entry, but soon would have resulted in a losing trade. The trick is to look to the market structure to the left of the chart.

We notice here how past attempts to break out to the upside failed. Therefore, any attempts to the upside should be viewed with suspicion. After a while price managed to breakout to the downside. But this too should be viewed with suspicion. The trick is to trade on the retest of this breakout, which as shown in the chart depicts how the breakout level has formed resistance.

From the chart, we also notice how there was an intermediate support level formed, which is where we would be looking to book profits.

2. Trading reversals with support and resistance levels

Support and resistance also helps with trading reversals. The key to trading reversals is in identifying past support and resistance levels. In the chart below we plotted a support level based on previous price action. ( ? What is Price Action tarding? ) After a brief rally, we see a downtrend being seen on the charts. Incidentally, we see a sharp reversal from the previously identified support level. Notice how price makes a very sharp pin bar to reverse from this support level?

Without the use of support and resistance, traders would have continued on with their shorts without knowing how price would have reversed when revisiting the past support level.

3. Trading pullbacks to support and resistance levels

Trading pullbacks offers an effective way to take a safe trade entry. In the following chart, we show how in a downtrend, price made several pullbacks right to previous support levels which turned to resistance. These traders would have offered a very safe trade entry with a very strong risk/reward trading strategy.

If you look closely you will notice how the pullbacks happen into the regions of past support levels. In the above example, we see three such instances which would have offered a great way to trade with a low risk, high probability trading strategy by simply determining the trend and the support and resistance levels.

4. Psychological support and resistance levels

Another support and resistance levels is the psychological numbers. The best illustration of this could be seen in the USDJPY where it is easier to spot as well as understand.

In the USDJPY chart above, notice how price reacts to key psychological levels of 95, 100, 103 and so on?

What are psychological support/resistance levels?

Psychological support/resistance levels are nothing but round numbers. For example, 1.3 in EURUSD, 1.6 in GBPUSD or 100 in USDJPY and so on are considered to be psychological levels. These levels however are not support or resistance levels, but in fact can act as either of the two. For example in the case of USDJPY, notice how the psychological level of 100 acted as resistance earlier on, which in turn became support as price managed to break above it?

The psychological support/resistance levels also offer a way to trade and can be used as entry points or exit points for booking profits.

5. Trend line support and resistance levels

Support and resistance levels can also be determined with trend lines. In the following charts, we see a down slope trend line. While the trend lines tend to act as support (in case of an uptrend) and resistance (in case of a downtrend), they also depict the price zones as well.

In the chart below we notice that besides the trend line acting as resistance, they also depicted horizontal support/resistance levels. Look closely at the charts and you will notice how price bounced off those levels at first contact. Pay attention to the most recent price action. To the layman, it might seem as a reversal. But for traders familiar with support and resistance, will know why price bounced off from that level, which incidentally was a strong support level.

As can be seen from the above examples, support and resistance forms one of the most basic building blocks of trading. They are also referred to as supply/demand levels. By having a firm understanding of the support and resistance levels, traders would be able to improve any trading system that they currently follow. See more about TrendLine trading here

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