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.