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In binary options trading, indicators play an important role. That’s because you can use indicators to learn the nature of the market. Indicators also help in understanding whether it’s the right time to invest in the binary options market or not.
With so many trading indicators available, it becomes difficult to find a good one. But you don’t have to worry because you can increase your trading profitability with a support and resistance strategy.
Support and resistance level is the roadmap to successful trading. It is an essential indicator tool that traders use for doing technical analysis of the market.
But do you know the right way of identifying support and resistance level? Do you know how to get the most out of support and resistance trading strategy? Or do you know how to trade by using support and resistance?
Well, this guide has all the relevant information.
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Good to know:
- Support and resistance levels help predict market direction changes in binary options trading.
- Support is where prices may stop falling, resistance is where prices may stop rising.
- Strategies include range trading, breakouts, and trendlines based on these levels.
- These levels are not foolproof and can lead to false breakouts.
What you will read in this Post
What are support and resistance?
You can use support and resistance strategy for both short-term and long-term trading. It’s an easy-to-understand strategy that helps in increasing trading profitability and decreasing loss.
In this trading strategy, after the price of an asset tests support and resistance level, it moves in the opposite direction. At this time, you can enter a trade and leave the market with a high chance of winning after a while.
In simple terms, support and resistance are nothing but a tool that shows an asset’s price reaction. It’s a direct result of differences in selling and buying.
The price rises if there are more buyers. Similarly, if the number of sellers is more, the price decreases.
Support
Support level in support and resistance trading strategy is the point at which buyers enter the market. Support is the floor that supports the price of an asset.
When the price of a commodity in the market starts declining, it finds a support level. After spotting the support, the price bounces back. But if the price breaks the level, it falls further till it finds another support level.
Resistance
Resistance level in support and resistance trading strategy is the level where sellers enter the market. Like support level acts as a floor, resistance level acts as a ceiling. It resists a price rise.
You can find a resistance level in trading when the price of an asset starts increasing. Once the price finds a resistance level, it bounces back. But if the price breaks the resistance level, it rises again till it finds another level.
Different types of support and resistance
Here are a few support and resistance that you can easily spot in a trading chart.
Horizontal support and resistance
Horizontal support and resistance is a static level, which supports and resists the price movement beyond it.
In horizontal support and resistance, when the price of an asset moves through support, it’s a negative sign. But it’s a positive sign when the price moves through the resistance level.
Also, if the price breaks through support and resistance level and crosses the level in the opposite direction, it shows the presence of a false breakout.
Diagonal support and resistance
Unlike the previous support and resistance level, this one is dynamic. That means the diagonal support and resistance change over time. Generally, it is created by trendline.
You can draw a line by finding a price high and lower price high or a price low and higher price low. After drawing the line, if you notice that the diagonal is down, the trend is down. Similarly, if the diagonal is up, the trend is up.
In diagonal support and resistance, it’s a positive sign if the price bounces off the trendline. Moreover, it’s a warning when the price breaks the trendline.
(Risk warning: Your capital can be at risk)
Predictive support and resistance
Another kind of support and resistance is predictive. Although this type is less common, it has its value. One of the common predictive support and resistance is trendlines. That’s because, in trendline, when the line extends, it can either support or resistance the price movement.
Another form of predictive support and resistance is horizontal support and resistance. You can also use this tool to understand the spot where future support or resistance might develop.
How can you make support and resistance strategy work?
If you want to make the support and resistance strategy work, you should have some basic skills.
Firstly, you must be familiar with the primary kind of binary options charts that brokers use. Bar and candlestick chart is a popular trading chart that you need to familiarize yourself with.
Additionally, you should know technical analysis. And lastly, you must understand what support and resistance are and how you can establish them.
Why support and resistance are important?
With the help of support and resistance, you can identify the price pattern in binary options trading. When you know the direction of price movement, you can select call or put options depending on the nature of the market.
By analyzing the support and resistance level, you can even know the right time to enter and exit a market. Here’s a quick example to understand how support and resistance level works.
Let’s assume that the shares of a company, say XYZ, are bouncing between $750 and $800. These are the support and resistance level. If the price of XYZ falls towards $750, you can place a call option near that amount.
Similarly, you can place a put option if the price of XYZ company goes towards resistance level.
Ways to built support and resistance
You can follow these steps to draw support and resistance zone.
Pick a chart
To draw support and resistance, you need to pick a familiar chart.
Identify highs and lows
Once you have picked a chart, you are then supposed to identify highs and lows. You can start by drawing the line at every highs and low. The lines will help you understand whether the market is trending or not.
After that, you can draw lines for connecting highs and lows. Remember that the horizontal line that you are drawing will not lie on every high and low. You can identify support and resistance once the process is completed.
This method of drawing support and resistance works perfectly in any time frame.
How to identify support and resistance?
For successfully using support and resistance in trading, it’s essential to identify them. Here’s how you can do it.
Historical data
One of the simplest ways to identify support and resistance level is by analyzing an asset’s past patterns and historical prices. You can do this by learning about the past pattern ranging from some time back to the most recent activity.
It’s also necessary to remember that historical data and past patterns are not always reliable criteria to identify support and resistance in a trading chart. That’s because the market condition constantly changes due to financial news.
Besides past patterns, you can also use previous support and resistance levels for identifying support and resistance levels. You can use past support and resistance level for entering or exiting a trade.
But previous support and resistance level is not an absolute method because the price of assets varies from time to time.
(Risk warning: Your capital can be at risk)
Technical indicators
Popular indicators like pivot points, moving averages, and Fibonacci tools can be used to identify support and resistance levels.
General rule
You can also identify support and resistance levels in the trading chart by using some general rules. For instance, you can draw a straight line from bearish reversal points.
Here, if the lines connect at least three points, it is considered as historical value resistance. If the line connects three reversal points, it is good historical support.
Different support and resistance trading strategies
With the right kind of support and a resistance trading strategy, you can win a trade. Here are four helpful trading strategies.
Range trading
Range trading strategy is the space between support and resistance. This space is created when traders sell at the resistance level and buy at the support level. In this case, resistance act as a ceiling, and support becomes the floor.
When using this trading strategy, you must remember that support and resistance are not always a straight line. That’s because the price of assets bounces off a particular area instead of forming a straight line.
In a range-bound market, when the price of an asset bounces off resistance, traders look for short entries. Similarly, they look for long entries in case of support.
Moreover, you can consider setting a stop above the resistance when planning to go short and below support when going long. A stop is vital because the price of the asset is not always inside a defined range.
Breakout strategy
When the price goes beyond a fixed range, it’s called a breakout. After the breakout, traders wait for the price to trend again.
You can find such breakouts above the resistance level and below the support level. If the price strongly moves in a particular direction, it might start a new trend.
But you must not place a trade because this breakout can be a false-out. Instead, you should wait for a pullback. Once you spot a pullback, you can commit a trade.
(Risk warning: Your capital can be at risk)
Trendline strategy
Another popular support and resistance trading strategy is the trendline strategy. In this strategy, you can use trendlines either as support or resistance. You can draw a line connecting two or more lows in an uptrend. Or two or more highs in a downtrend.
If the price trend is strong, the price will bounce off the trendline. And then, it will start moving with the trend.
Moving averages
You can also use the moving averages indicators for analyzing support and resistance level. Some of the standard moving averages that you can choose are 20 and 50.
You can also slightly alter these numbers to 21 and 55 for using Fibonacci numbers.
How to get the most out of support and resistance?
If you want to get the most out of support and resistance trading strategy, follow these tips.
Don’t get lazy with charts
When you trade a particular kind of asset for a long time, you get a feeling that you know how its price will move. And this feeling comes out of the experience.
But you should not get lazy with your charts because binary options are a volatile market, and it can surprise you. Thus, you must always track price action, collect reliable data, and keep accurate charts.
Asset prices test support and resistance
When you make a trade by following support and resistance trading strategy, you will notice that asset price tests support and resistance without breaking through the levels.
When this happens, you should wait for the price to form a new trend. And instead of rushing to make a trade, you should calm your nerves and let the market become normal.
Expect two price bounces
When you are charting the price action of an asset, you can notice two price bounces. Sometimes, you will see three bounces. That happens because each bounce strengthens the signal.
Watch for breakouts
In support and resistance trading strategy, breakouts are common. When there is a breakout, it forms a new trendline. You can use this opportunity to make more profit.
Limitations of support and resistance trading with Binary Options
While there are some benefits of using support and resistance trading strategy, there are some limitations. You must know them to avoid losing money.
- This trading strategy does not provide a specific result. Even if the price of shares is breaking the support or resistance level, there are chances that the price will not follow that trend.
- There is a false breakout. It makes difficult for traders to identify accurate support and resistance level.
(Risk warning: Your capital can be at risk)
Conclusion: Use Support and Resistance strategies for enhanced Binary Options trading
Support and resistance is a popular binary options trading strategy that you can use to understand the market’s nature. Besides this, support and resistance also help in determining the strengths and weaknesses of the trend.
If you notice that the price of an asset is breaking the support or resistance level but crosses the level back in the opposite direction, it means there is a false breakout.
While sometimes, it gets tough to identify support and resistance due to false breakout, you can always do a successful analysis to make a profitable trade.
Frequently asked questions about Support and Resistance strategies:
What is the Support and Resistance strategy in Binary Options Trading?
Support is the price level where buying interest is significantly strong and prevents the price from declining further, acting as a floor. Resistance is the level where selling interest overcomes buying pressure and stops the price from rising further, acting as a ceiling. This strategy helps traders understand market trends and make decisions on when to enter or exit trades.
How do you identify Support and Resistance levels?
Support and resistance levels can be identified using historical price data, technical indicators, and general chart analysis. Traders often look at past price patterns, use tools like pivot points, moving averages, and Fibonacci retracements, and draw trendlines connecting significant highs and lows.
What are some common Support and Resistance trading strategies?
Common strategies include range trading, where traders buy at support and sell at resistance; breakout trading, where traders enter a position when the price breaks through these levels; and trendline trading, using trendlines as dynamic support or resistance. Moving averages can also be used to identify potential support and resistance areas.
What are the limitations of using Support and Resistance in binary options trading?
While support and resistance levels can be powerful tools, they have limitations. These levels do not guarantee specific outcomes. The market’s volatile nature means that even if a price breaks these levels, it might not continue in the expected direction. Traders need to be cautious and combine this strategy with other analysis methods.
