It is essential when trading binary options to use levels of support and resistance to inform your trades. These lines can be plotted on an analytical chart in order to determine the direction of the markets and identify the direction which the price of an asset is likely to head.
Many novice traders think that charting the lines of resistance and support is quite complicated, however it is actually pretty simple to do. Once these levels are fully understood, an investor will have a powerful tool that they can use to execute profitable trades.
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What are Lines of Support and Resistance?
A support line shows the level below which an asset’s price is unable to fall in a certain time period. Each time the asset’s price comes close to the line it will slow down and then reverse direction. Conversely, a resistance line shows the level that an asset’s price is unable to rise above. Every time the price of the asset approaches this level, it starts pulling back.
Lines of support and resistance are able to be plotted over various time periods depending on your trading activity. For long term trading, a monthly chart is suitable, whereas short term traders will need to track around 10 to 15 minute intervals or they will miss trade execution opportunities.
The lines of resistance and support are vital for identifying price patterns which are useful in determining the likely asset price directions. Using these signals, a trader is able to place put or call options with greater confidence in the outcome. For example, if an asset’s price has repeatedly tested the support level on multiple occasions and failed to break through, it is likely to trading volume of that asset will increase once its price reverses and begins to head upwards. The trader can therefore place a call option to make a profit from this move. The same strategy works on the resistance level too, however the trader would place a put option instead of a call option in anticipation of the asset’s price turning to a downward move.
How to Identify Levels of Support and Resistance
To identify these levels on a chart, it is important to chart the price action and then to take note of each high point as the asset’s price goes upward before its direction is reversed. As the price of the asset moves down, each low point must be noted before the direction reverses. This should be done over the period of an hour at 3 minute intervals in order to see the resistance and support levels forming. Every time the asset’s price tests the low or high level and fails to break through, the level will grow stronger. Eventually, the price will break through these levels, but the stronger they are, it is more likely the breakout signals the formation of a brand new level.
It is important however to be aware of false levels of support and resistance. The asset’s price may often go up and down within the small regions between the asset’s price range low and high points. These mini bounces are not true levels of resistance and support and mistaking them for this will lead to poor trades.
How to Use Levels of Support and Resistance to Inform Trades
A trader should watch for any breakouts, using the current price levels as a guide, but using the changes as a chance to make profits. In drawing up the chart for an asset’s price action, an investor should always expect to see a minimum of two price bounces before calling a certain low or high a level of support or resistance. Three bounces or more is advisable as each will indicate a stronger signal. It is important to never become complacent with your charting, even if you trade your favourite asset regularly. Although intuition is key, the tracking of price actions, collection of reliable data and the keeping of accurate charts is much more important overall.
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- Signal crosstalk and induced resistance: straddling the line between cost and benefit. Bostock, R.M., 2005. Annu. Rev. Phytopathol., 43, pp.545-580.
- Point and figure charting: A computational methodology and trading rule performance in the S&P 500 futures market. Anderson, J. A., & Faff, R. W. (2008). International Review of Financial Analysis, 17(1), 198-217.