Support and resistance are two key concepts in binary options. They measure specific supply and demand levels of price action and when breached, price action will generally continue in the direction of the breach. Many binary options strategies are based on support and resistance. In this article, you will learn to identify support and resistance in a market.
WHAT ARE SUPPORT AND RESISTANCE?
A market, no matter how stable, experiences fluctuations throughout a day of trading, whether they are upward or downward. According to its peaks, expert traders are able to define what are the resistance point and the support point.
The resistance and support lines prove where the emotions of the market are clustered.
Here’s a brief definition:
- A resistance level sits above the current price. It is therefore considered to be the price ‘ceiling’.
- A support level sits under the current price. It is therefore often referred to as the price ‘floor.’
In other words, the resistance is a price at which sellers tend to enter an asset and the support is a price at which buyers tend to enter an asset.
If the price rises above a resistance level, then resistance is broken. If the level isn’t broken, then resistance has been (re)confirmed or “resistance held.”
If the price drops below a support level, then support is broken. If the level isn’t broken, then support has been (re)confirmed or “support held.”
There are numerous ways to determine support and resistance. One basic way for identifying support and resistance is by analyzing the chart to see were the price hit a particular level multiple time without breaking it and retraces back (as you can see in the figure).
A very basic binary options strategy that traders use to trade using support and resistance is they buy at support and sell just before the resistance level. But, obviously, support and resistance levels are not permanent.