Basic Binary Options Tool And Strategy: Support And Resistance
This is a great introduction into support and resistance theory for binary options trading. Support and resistance are a popular and useful tool of technical analysis and one that binary traders should be using. Includes video example of how to use support and resistance to make a binary trade.
Support and resistance is one of the most basic forms of technical analysis. It is a theory commonly found in technical analysis, used by most traders and measured in multiple ways. At the core, support and resistance are areas, or more to the points prices ranges, where the price of an underlying asset is likely to encounter buying (in the case of support) or selling (in the case of resistance). Support and resistance theory can be used in any time frame used to determine areas where prices are likely to stop moving or even change direction. The theory is most often used with charts of price history. Areas where the price of the underlying asset have bottomed, reversed or consolidated are likely areas where support and resistance can be found. The more times an area has been tested the stronger the support or resistance.
- Support – v. bear the weight of, hold up. n. a thing that bears the weight of or keeps upright.
- Resistance – n. a force that tends to oppose or retard motion
Technical Analysis: Support And Resistance
Support on a chart of price history are areas where buyers are likely to step in. Buyers are likely to step in because the level is an attractive buying opportunity. Buyers come in many forms and use a wide variety of means to determine buying opportunities so there are an equal number of ways to determine where support may be found. Some of the places support may be found on a chart are along moving averages, Fibonacci Retracements or trend lines you draw yourself. Resistance is areas where seller may step in. Sellers may be previous buyers trying to get out of a bad trade or technical traders trying to capture market weakness.
Moving averages are among the most commons ways of finding support because of how adaptable they are. A MA can be set to any length, can be simple or exponential and can be applied to any time frame. One thing to keep in mind that the short the length of the average the weaker the support. For example, a 30 day moving average bounce will not be as strong as a 150 day moving average bounce. The 30 day moving average is short term indicator while the 150 day moving average is a long term indicator.
How To Draw Support And Resistance Lines
Support and resistance lines are lines you draw yourself. They can be divided most easily into two categories; support/resistance and trend lines. Support/resistance lines are horizontal lines (usually) that connect the peaks and troughs of market tops and bottoms or mark consolidation zones. You can draw a horizontal line from any market top, bottom or consolidation zone. The strength of the line will depend on what time frame you use and how many times it has been tested by price action. A support line drawn on a chart of weekly prices will be stronger than a support line found on daily prices. Likewise a resistance line that has been tested 2 or 3 times is much stronger than one that is drawn from only one peak.
A trend line is a diagonal line that connects higher lows in an up trend and lower highs in a down trend. A trend line measures the average rate of increase or decrease in a trending market. I have found that trend lines are especially useful in bull markets because the pace of increase is usually much more measured than that of a bear market. In a trend the market mentality fears that prices will not retreat down to support. In order to capture perceived future gains participants must be willing to buy into the rally at a higher price. This will display on a chart as a series of higher troughs.
It comes down to the buyers and sellers. Each time that price action reaches a support line and then bounces up it means that more people have bought the asset at that price. The more people that own an asset at a certain price the less likely it is for prices to fall below that level. The same is true in reverse for resistance. Each time that prices fall from a resistance level it means that more people are selling. The more people that sell an asset the lower the price will fall. Any means of measuring support can also be used to measure resistance. When prices are below the moving average it will provide resistance to higher prices the same way that a Fibonacci Retracement will when prices move up against it.
Fibonacci Retracements are great way of predicting where support or resistance may be and to confirm areas of support or resistance indicated by other means. Briefly, Fibonacci Retracements are a way measuring trends and dividing them into pre-determined levels. These levels are based on the Golden Ratio and work done by the great mathematician Fibonacci. Retracements provide targets based on the ratios found in nature. It is uncanny how the tool works, I am frequently amazed at how accurate the predictions can be. However, there is a caveat. Fibonacci makes predictions, it doesn’t tell the future. It takes a little practice and a touch of artistry to utilize Fibonacci by itself. This is a great tool but works best when used with other tools.
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The Reflexive Theory Of Support And Resistance
Support and resistance lines are reflexive. This means that a support line can become resistance and a resistance line can become support. How is this possible you may be asking yourself? There are only so many buyers for any one asset at a given price. When prices retreat to a support level and the buyers dry up then prices may fall beneath support. When this happens all the people who have bought in at the support line now become losers on their trade. When prices move back up to the support line some or all of the new losers may seek to get out of their trade. This selling becomes resistance for higher prices. Whenever prices break below support I always look for that line or level to provide resistance in the future. That could be the next day, the next week or even the next year. Again, this theory works the same for resistance. If prices move above a resistance level that level can become support in the future. This is because it is an area where bears have switched position from selling to buying. Any time that prices retreat back down to a broken resistance level I expect to find new support.
Trading Binary Options With Support And Resistance
Support and Resistance lines provide good targets for entry points on binary options trades. When the price of an asset reaches either one the lines you can expect to receive a signal. This signal could come as a reversal of prices or as a continuation. It is important to wait for a solid signal once price action reaches the line because there is no guarantee prices will reverse. Once a signal is detected then trades can be made in the direction of the signal with a high rate of success. Expiry times should be tailored to fit the time frame you are trading. I typically use expiry times ranging from 4-8 hours when I trade off of the hourly charts and expiry of one week to one month when trading off of the charts of daily prices. I made a short video to help explain how support and resistance can be used to make a trade. I use three different time frames to determine possible areas of support/resistance. Weekly lines are stronger than daily lines are stronger than hourly lines so I know that if prices are bouncing from a long term weekly line they could move through a short term daily line or blow right past a near term hourly line.