Support and resistance levels are key areas where the price action of an asset can experience a stall in a downtrend and uptrend respectively. Support and Resistance trading strategy is one of the simplest and safest technique for beginners. Find here how to trade binary options using support and resistance and start to make profit with binary options.
The resistance line in a price chart indicates the price level at which the price of the asset stops rising any further. Traders believe that by the time the price of an asset touches the resistance levels, supply overcomes demand thus preventing the price from rising any further. The support line, on the other side, is the indication of the price at which the asset’s price stops falling any further. This means that there is a strong demand for the asset at that price and thus the only way the price can move is upwards.
Of course, support and resistance levels that exist in higher chart time-frames such as on the daily or weekly charts, are going to be stronger than those from say, a 5 or 15 minute chart. It has been recommended to set up your support and resistance levels based on a 15 minute time frame.
A simple strategy for binary options traders is to use these patterns and figure out when the new directions emerge and from which prices. Anyway, while support and resistance levels are an important trading concept, they should be considered complementary to a strategy, rather than the basis of a complete trading strategy for binary options in themselves.
How to trade on support and resistance levels?
The support/resistance is a short-term strategy that can help you utilize the levels of support and resistance to your great merit. The basic concept is: if you wish to sell into the market, one of the best locations to sell will be near a resistance area. On the contrary, if you wish to buy in the market, one of the best locations to buy will be near a support area.
The best thing about this strategy is that it gives you a great chance of success if you’re quick enough. Usually when the price tests the level of support/resistance (which means reaching it without breaking it), it goes in the opposite direction, which is when you should enter the trade.
Anyway, you need to expect the price to push through them at some point. Breaks of key levels are more likely to occur if there are repeated tests of these key levels. When a line is broken, it changes character. The support line begins to act as a new resistance line. The resistance line begins to act as a new support line depending on which line that breaks through. In situations where the asset makes a full reversal at these key levels, it is easy to set a CALL trade if the price bounces at a support or a PUT trade if the price retreats from a resistance. Support and resistance levels are not permanent.
So, you need to determine how strong the support and resistance lines are. The stronger they are the greater the confidence you will have to trading accordingly with them. We tend to say 2-3 touches confirm a good possible entry point. A further step is to consider the price action in relation to other patterns such as Bollinger Bands and the presence or absence of doji candles. In order to minimize the risks, you shouldn’t trade more than 5% of your capital with this strategy.