Levels 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.

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.

Support and Resistance

One of the most important tools for our trading here at Binaryoptiontrading.com is the use of support and resistance levels. These lines or areas of price action give so much information for us to take the best trades possible on the binary options market. Without support and resistance we would be lost, not knowing where price might go next. Although it may take some a while to understand this concept, it will be the strongest indicator you have while trading in any market.

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Will go over this concept in depth looking at support and resistance individually and how you can create your own areas of S/R for future trades. The first topic we are going to discuss is support levels.

What are Support Levels?
When you are watching the price action it will be up to you to figure out where price might go. If you were to remove every line, indicator, or anything else for that matter on the chart and predict price action, support can help you make the best decision. Trading on the binary options market is just like anything else. We look for certain areas of where price action might go and then enter our trade. Prices have a tendency to move up and down throughout the day. We want to look for areas where price bottoms out and moves back up. This can be based on several different factors. One being a whole number were price might get down to and move back up. Another is where a pivot level is located. As price moves down into this pivot line, price action could bounce off this area. There are many factors of support and you will learn them as you study.

When trading the markets using support, you want to find a trade where the support has a lot of weight. Although price might move down to a certain area, it’s best to wait for the trade to come to an area where you know price has a stronger chance of holding. Any time you see price hold a certain level, you can trade it again knowing that this level has held in the past. Remember, just because price held once, doesn’t mean it will hold again. We also want to look for extended moves past support levels. When we talk about extended moves, we mean price moving past the support level by a small percentage. This means support is still holding, but forming a rubber band scenario. Price will bounce back up after pushing through support and move in the direction you are seeking. Another way to look at support levels is finding old resistance levels. We talk about old resistance becoming new support. This is critical when trading. If you can find an area that was holding very well as a ceiling, and a price finally breaks through it, it now becomes a floor to trade. These are just some aspects of using support levels for your trading.

What are Resistance Levels?
On the other side, we look at resistance for our put option trades. As price climbs to certain areas of resistance we will enter put options looking for the price to move back down. As price climbs into these areas of resistance you want to make sure you have a couple things working for you. A whole number for example can be used as resistance. We’ve seen this happen numerous times, where price climbs to the whole number and pushes back down soon after. As a binary options trader this can allow you to take good put options.

Also remember, if the support floor is broken, it then becomes a resistance ceiling. This allows you to take trades at all levels of support by using them as resistance. These are strong setups that occur on a daily basis and should be used.

Trading support and resistance together is as good as it gets. We don’t always need a whole number or some particular price to have these numbers set up for us. You can develop your own support and resistance levels as you watch price action throughout the day. If price hits a certain area and pulls back a couple of times, you know that this area is a good potential S/R spot. If price were to push down but not all through several times, then you know price is hitting a strong area of support. It’s up to you to find these areas and trade them the best you can.

There are several other ways to look at support and resistance and you will learn these as you start studying. Once you get a better understanding of these concepts, trading will become a lot easier. You just need to be willing to commit to understanding the facts, and once you do, binary options trading becomes a lot easier.

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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