Binary options trading might sound easy to some, but only one who has traded in this market knows the difficulty. Undoubtedly, this market helps in winning a huge payout. But a person can also lose all the invested amount for an inaccurate price movement prediction.
However, there is one thing that always rescues binary options traders from making terrible trading choices. It’s the trading indicator. Indicators available for binary options trading can help traders predict the price movement of an asset.
Among the available options, support and resistance is a common trading tool that many traders use. This trading tool can be seen as a roadmap to making a successful trade. You can follow the direction provided by this tool to make a winning trade.
But for reaping better profitability from the Support and Resistance strategy, you need to know how it works? What are the different types of support and resistance? Why is this trading tool important? And most importantly, what are its limitations?
This post answers all these questions.
What are support and resistance?
Support and resistance is a popular trading tool that both short-term and long-term traders can use. The highlight of this tool is that it’s an easy-to-understand. With the right application, it can help you win a better payout.
After testing the support and resistance levels, this trading strategy says that an asset’s price will move in the opposite direction. So, if you want to trade, you can enter the market at this time because it’s when you have a better chance of winning a huge payout.
In a simpler version, you can see support and resistance level as a tool that tells about a price reaction in the trading market. The reaction comes into action when there is a difference in buying and selling.
If buyers are highly involved in the trading market, the price of assets will increase. But if sellers are involved in the market, the price will decrease.
Many new traders think that the concept of support and resistance is complicated. But in reality, it’s not. And once you have understood how support and resistance work, you can use them to make better trading strategies.
Among support and resistance levels, it’s the support level at which buyers enter the market. This level can also be seen as the floor in the market that supports the price of an asset.
One interesting thing about this level is that when the price of an item declines, it finds a support level. And once the support level is spotted, the price bounces back.
However, if the price breaks the support level while declining, it falls further till it finds the next support level on the chart.
Resistance, on the other hand, can be seen as the point where sellers enter the market. It’s the opposite of support level. That’s why where one side, the support level is the floor, the resistance level acts as the ceiling.
You can easily spot a resistance level on the trading chart when the price of an asset increases. After finding the level, the price bounces back. But it raises further and finds another resistance level if it breaks the first level.
Support and resistance types
Support and resistance levels are further differentiated into different types. You can understand each of these types to use this indicator under different trading situations correctly.
Horizontal support and resistance
It’s the first kind of support and resistance level that supports and resists the price of an asset beyond a certain level.
It can be seen as a static level. During this level, if the price of an asset travels through resistance, it’s a positive sign. But if it’s passing through the support level, it’s a negative sign.
Besides this, sometimes there can arise a third situation. In this case, the price goes through both support and resistance level. It further crosses the level in the opposite direction. When this happens, it shows a false breakout.
Diagonal support and resistance
Diagonal support and resistance are rather dynamic than static. In this type, the level changes over time. In an obvious trading environment, diagonal support and resistance are created via trendline.
To identify diagonal support and resistance, you need to draw a line. Thus, you should find a low price and higher price low or price high and lower price high. Once you have drawn a line, you then need to check the direction of the diagonal. If it’s up, that means the trend is up. But if it’s down, that shows the trend is down.
Another thing to check in diagonal support and resistance is the price bounce and price breaks. When the price bounces off the trendline, it’s a positive sign, but if it breaks, it’s a warning, aka, negative sign.
Predictive support and resistance
It’s the last kind of support and resistance level that you can identify in a trading chart. While predictive support and resistance are not that common, it’s essential. Among the available options, trendlines are a common and useful predictive support and resistance level.
In trendline, the price movement of an asset is either supported or resisted when the line extends. Besides trendline, horizontal support and resistance also fall under the predictive support and resistance category.
Generally, predictive support and resistance are used for knowing where the support and resistance might develop in the future.
How can you make support and resistance work?
For making support and resistance work, it’s essential to be familiar with the basics of this trading strategy. But this is not it. You must also know about different types of binary options trading charts offered by trusted trading platforms.
Among those charts, candlesticks and bars are common. Besides this, you must also familiarize yourself with some functional technical analyses.
Importance of support and resistance
Support and resistance levels matter in binary options trading because it helps to know the price pattern of a binary options trading strategy. When you know how the price of an asset will travel, you can confidently select a call or put option, depending on the market.
Not just this, but specific traders also use support and resistance level to identify the correct entry and exit time. This way, they avoid making bad trading decisions, which keeps them safe from losing a considerable amount of money.
This quick example will help you understand how support and resistance works.
Imagine that a share of a company is somewhere between $900 to $950. These can be seen as the support and resistance level. In this situation, if the price of the shares goes towards the resistance level, you should place a put option. But if it falls, place a call option.
How to build support and resistance?
If you correctly want to draw a support and resistance line, you must follow the below-mentioned steps.
Pick a chart
First thing first, you need a chart. It would be beneficial if you picked a chart that you are familiar with.
Identify highs and lows
Once you have a familiar chart by your side, you can then identify its highs and lows. So, you should analyze the price movement of assets and then draw the line at every highs and lows.
This way, you will get a clear understanding of whether or not the market is trending. After analyzing the chart and the market, identify the highs and lows and draw a line between them.
Once the process is completed, you can quickly identify support and resistance. One thing to consider is that the horizontal line will not lie at every high and low. This way of drawing highs and lows works perfectly on different time frames.
Ways to identify support and resistance
Just as drawing support and resistance is easy, identifying it is also easy. You can follow a few steps to identify support and resistance.
One of the easiest ways to identify support and resistance is via historical data. When you check the historical data and asset’s past price trend, you get a clear understanding of the market. Analyzing historical data is possible by learning about the past pattern.
While it’s a popular way, it cannot be seen as a reliable way. Why? Because binary options is a volatile market and bigger financial news can instantly change the market condition. So, you must not entirely depend on it to identify the support and resistance levels.
You can also consider the past support and resistance level and historical data to identify the profitable support and resistance. Using this information, you can make an ideal market entering and exit strategy. However, it’s not a reliable way because the price of an asset keeps changing.
Besides historical data, technical indicators can also help you identify support and resistance levels in a trading chart. Commonly used indicators are Pivot Points, Moving Averages, and Fibonacci tools.
The last way of identifying support and resistance levels is by following the general rule that says drawing a straight line from the bearish reversal point. Here, if the drawn line connects three reversal points, it means it’s good historical support.
Support and resistance trading strategies
The following support and resistance trading strategies can help you win a considerable payout while trading binary options. Here are a few best support and resistance trading strategies.
Range trading strategy is commonly used in binary options trading. In this strategy, space is created between support and resistance. The space is only created when the traders sell resistance-level assets but purchase them at the support level. When this happens, the support level acts as a floor, and the resistance level becomes the ceiling.
You need to remember while using this strategy, support and resistance are not always straight lines. It happens because, at certain times, the price bounces off an area rather than forming a line.
While trading in a range-bound market, traders search for long entries when the price bounces off support. But they look for short entries if the price bounces off resistance.
While range trading is an excellent strategy, you might want to place a stop loss. That’s because a stop loss will help you stay away from making trading blunders.
After the range strategy comes the breakout strategy. Once there is a breakout, this strategy requires traders to wait till the price trends again. You can find breakouts above the resistance level and below the support level.
Also, if the price of an asset moves powerfully in a direction, it indicates the emergence of a new trend. If you don’t want to lose your money by following a breakout strategy, you must wait for a pullback. That’s because, at certain times, a breakout can be false.
The next one is the trendline strategy. Here, you can use the trendline either as support or resistance. Depending on the market condition, you can draw a line to connect two or more highs in a downtrend or two or more lows in an uptrend.
In case if the price bounces off the trend line, that means it will start moving with the trend.
How to use support and resistance to the fullest?
It’s essential to stay alert because binary options are a volatile market. And entirely depending on the chart can be risky. That’s why it’s advised to track the price action constantly.
It’s also important to remember that asset price checks the support and resistance level. In this case, the price needs to form a new trend.
Limitations of support and resistance strategy
While support and resistance is an excellent trading strategy, it has got certain limitations. For starters, this trading strategy does not provide any specific result. Since binary options are a volatile market, there are high chances that the price might not follow the trend.
Besides this, a false breakout is a common occurrence in support and resistance trading strategies.
If you want to use a support and resistance strategy to trade in the binary options market, it’s important to remember the limitations. Considering that, create a winning trading strategy that will not disappoint you.
Or you can use one of the strategies suggested in this post. With a good knowledge of binary options trading, and support and resistance, you can master the suggested strategies.