The support and resistance strategy is your secret weapon for spotting market direction changes in binary options trading. But can you confidently identify these key levels and maximize their potential? Dive into this strategy guide for everything you need to trade smarter and more effectively.
Key Facts About Support & Resistance Trading Strategy:
- 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 is the Support and Resistance Strategy?
The support and resistance strategy works well for both short- and long-term trading, making it an easy-to-understand method to boost profitability and minimize losses. The idea is simple: when an asset’s price tests a support or resistance level, it often reverses direction. This creates an opportunity to enter a trade and exit later with a higher chance of success.
Support and resistance levels are essentially tools that reflect how an asset’s price reacts to market forces. When buyers dominate, prices rise; when sellers take over, prices fall.
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Example of A Support
The support level in a 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.
Example of Resistance
The resistance level in the support and resistance trading strategy is the level at which sellers enter the market. Just as the support level acts as a floor, the resistance level acts as a ceiling. It resists an increase in price.
You can find a resistance level in trading when the price of an asset starts to rise. When the price finds a resistance level, it will bounce back. However, if the price breaks through the resistance level, it will continue to rise until it finds another level.
Different Types of Support and Resistance for Binary Trading
Here are a few support and resistance points you can easily spot in a trading chart.
Horizontal Support and Resistance
Horizontal support and resistance are static levels that support and resist the price movement beyond them.
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 the 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 levels, 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 a lower price high or a price low and a higher price low. After drawing the line, the trend is down if you notice that the diagonal 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.
Predictive Support and Resistance
Predictive support and resistance are other valuable but less common types. Trendlines are a popular example, as their extended lines can act as future support or resistance for price movement. Horizontal support and resistance are other predictive tools that help identify potential areas where support or resistance may form in the future.
How Can You Make The Support and Resistance Strategy Work?
If you want to make the support and resistance strategy work, you should have some basic skills.
First, it’s important to get familiar with brokers’ primary binary options charts, such as bar and candlestick charts. You should also have a solid understanding of technical analysis. Finally, make sure you know what support and resistance are, and how to identify them.
Why Are Support and Resistance 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 of how support and resistance levels work.
Let’s assume that the shares of a company, say XYZ, are bouncing between $750 and $800. These are the support and resistance levels. 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 toward the resistance level.
What are the Ways to Draw Support and Resistance for Binary Options?
You can follow these steps to draw support and resistance zones.
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 supposed to identify highs and lows. You can start by drawing lines at every high and low. The lines will help you understand whether the market is trending or not.
After that, you can draw lines connecting highs and lows. Remember that the horizontal line will not lie on every high and low. Once the process is completed, you can identify support and resistance.
This method of drawing support and resistance works perfectly in any time frame.
How To Identify Support and Resistance:
To successfully use 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 levels is to analyze an asset’s past patterns and historical prices. You can do this by learning about past patterns 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 for identifying 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 to identify support and resistance levels. You can use past support and resistance levels to enter or exit a trade.
But previous support and resistance level is not an absolute method because the price of assets varies from time to time.
Technical Indicators
Popular indicators, such as pivot points, moving averages, and Fibonacci tools, can be used to identify support and resistance levels.
General Rule
Using some general rules, you can also identify support and resistance levels in the trading chart. For instance, you can draw a straight line from bearish reversal points.
Here, if the lines connect at least three points, it is considered historical value resistance. If the line connects three reversal points, it is good historical support.
Different Support and Resistance Binary Options Trading Strategies
With the right kind of support and a resistance trading strategy, you can win a trade. Here are four helpful Binary Options trading strategies.
Range Trading
A 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 acts 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 asset prices bounce off a particular area instead of forming a straight line.
In a range-bound market, traders look for short entries when an asset’s price bounces off resistance. 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 asset’s price is not always within 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.
Such breakouts can be found 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.
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 start moving with it.
Moving Averages
You can also use moving average indicators to analyze support and resistance levels. Some standard moving averages 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?
Follow these tips if you want to get the most out of support and resistance trading strategy.
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 they 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 a support and resistance trading strategy, you will notice that asset price tests support and resistance without breaking through the levels.
You should wait for the price to form a new trend when this happens. 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 chart an asset’s price action, you can notice two price bounces. Sometimes, you will see three bounces. That happens because each bounce strengthens the signal.
Watch for Breakouts
Breakouts are common in support and resistance trading strategies. 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 to using support and resistance trading strategies, there are also 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 it difficult for traders to identify accurate support and resistance levels.
Conclusion: Use support and resistance strategies for enhanced Binary Options trading
Support and resistance is a key strategy in binary options trading, helping you understand market behavior and assess the strength of trends. When the price breaks through a support or resistance level but quickly reverses, it indicates a false breakout. Although false breakouts can make identifying these levels challenging, a thorough analysis can still lead to profitable trades.
