Support and Resistance
trading is a big part of price action trading, the so called bread and butter if you will. Before venturing into strictly price action trading it is of great importance that you fully understand the ins and outs of support & resistance. S&R levels come in different forms. Horizontal, vertical, diagonal and even dynamically. The basic bare bone structure of S&R is the horizontal lines, drawn in manually, using no fancy indicators or formulas. This might sound difficult, but after some practice, you can spot and identify these levels in your sleep. Once you master this a whole new world of binary options trading opportunities will present themselves. Ready, Set - GO!
Definition Of Support And Resistance
What Is Support?
A Horizontal Support
line is a price level at which demand
is speculated to be strong enough to pause, or prevent the price of an asset from decreasing further. Support levels are levels below the current market price. Support is associated with buying
and is seen as bullish
. When Support is broken it then becomes Resistance.
The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.
Figure 1 - Support Level
What Is Resistance?
A Horizontal Resistance
line is a price level at which supply
is speculated to be strong enough to pause, or prevent the price of an asset from increasing further. Resistance levels are levels below the current market price. Resistance is associated with selling
and is seen as bearish
. When Resistance is broken it then becomes Support.
The logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.
Figure 2 - Resistance Level
How To Draw Support and Resistance Levels
Not all Support & Resistance levels are rated equally. To identify strong or weak levels we need to look at price history. Sometimes it only requires us to look back a few hours, and sometimes as long as days or months. We are looking for previous price tests of these levels to validate the Support or Resistance level.
Factors that validate levels:
- Round Numbers (Every 100, 500 and 1000 pips).
- Levels that have previously proven to act as Support or Resistance.
Both of these factors are visual psychological levels. Since the market price of any asset is mostly driven by human decisions, price always tends to react to these levels in some way or another. It is important to note that price will not react to the exact pip, but rather in close proximity to these levels. Don't get me wrong, it is sometimes scary to see price touch and turn on a dime when it reaches these levels. As a rule of thumb these S&R "lines" should be seen as zones, rather than exact points. Give or take a few pips to either side of the line.
Figure 3 - Horizontal Support & Resistance Lines
Support and Resistance levels DO NOT hold forever! They WILL get violated at some point. Also notice that broken support levels can become resistances, and broker resistance levels can become supports. Figure 3 illustrates this principle as the support line was first a resistance.
Applying The Strategy To Binary Options
Applying this strategy to binary options trading is very simple and effective. Support & Resistance trading allows for a very fixable trading environment. It can be used during trending, ranging and consolidating market conditions. This is one of the reasons this strategy is so popular and widely used amongst traders.
From a binary point of view we would place a call trade when price reaches a support level and place a put when price reaches a resistance level. This can be applied on any time frame. Ideally we would only trade the first 2 touches after the level has been confirmed as a valid Support or Resistance level. Rather be conservative than greedy.
Metatrader indicator for supports and resistances
As always, MetaBinaryOptions is offering you a free Metatrader
indicator for helping you apply this strategy.
Click here to download the indicator 100% free
The indicator will automatically draw supports and resistances levels. Spot the alignment of multiple levels for stronger signals.
Figure 4 - Metatrader Indicator for Supports & Resistances
Support and Resistance Summary
This strategy is a great starting point for any form of trading and should be part of any trader's basic knowledge. One can add to this, forming many other different types of strategies. Like mentioned before, this should be your bread and butter. Although identifying these levels might be difficult, practice makes perfect, and the benefits will be well worth while.