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Support and Resistance in Binary Trading
In trading binary options, the binary options trader will constantly be looking at charts denoting uptrends and downtrends of each of the assets that they have chosen to trade in. Binary options brokers provide the right tools in order for traders to make the best decisions in their trades. Every indicator plays an important role if the binary options trader wants to make a successful trade every time. Learning how to read these indicators and knowing market sentiment is the best way to successfully trade binary options.
As many of us already know, the price of a financial instrument are affected by many market forces at play. But, the price of an asset is ultimately determined by supply and demand. Very simply, if the demand of a financial instrument is increasing relative to the supply, then price will rise. Conversely, if the demand for a particular asset is decreasing relative to the supply, then price will fall.
As we have determined in the previous articles, what we are basically looking at when we see an uptrend on the chart is a period of time when demand has continuously increased in relation to supply. Again, conversely, what we are looking at when we see a downtrend on the chart is a period of time when the demand has continuously decreased in relation to supply. What support and resistance is all about is when the price levels at which demand and supply equations reverses itself and prices are expected to stop moving in the direction that it was moving before and potentially reverse itself.
Support and Resistance Lines
Support is defined as the price level of a particular asset where there is enough demand should the price reach that level to keep prices from falling further. Resistance on the other hand is the price level of a particular instrument where there is not enough demand should the price reach that level to keep prices from rising further.
Here is an example of an excerpt of a price chart of a certain asset where support levels is shown as the black line where reversals have happened from a downtrend to an uptrend.
From the figure, we can see that the price has touched that level several times, three times to be exact, and then it has never touched it again. A support level that is held is what it is called.
The same example shows a black line, this time showing the resistance level of the price of the asset, where reversals have happened from an uptrend to a downtrend.
The price has touched the resistance line three times, enough to establish a resistance line. You will also notice that the third reversal from a downtrend to an uptrend was not held by the resistance line during this period, as seen by the price level breaking through the resistance line and continuing to trend upwards.
Support and resistance lines do not necessarily have to horizontal. As we have learned about trends in the previous articles, trendlines can actually be support or resistance lines denoting the trend in the market. While horizontal support or resistance lines denote markets, or where markets are showing constant reversals, these lines also show trends. Therefore, the black arrow in the excerpt shown above is actually a support line in the uptrend. Here is another example from the same chart.
Here we see an uptrend where the price touches the support line several time before eventually breaking down to a downtrend lower than the support line. Support points are the lowest points reached before each recovery of the binary option asset upward. Conversely, a resistance line can be shown as such.
In the figure above, a resistance line is drawn from the same excerpt showing the price touching the resistance line several times. This line is acting as a resistance to the uptrend. We can think of it as a boundary of the price preventing it from rising even more. To define the resistance points, just take the highest point reached just before the price begins to drop. Each upward peak represents a resistance point.
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Binary Options Strategies using Support and Resistance
A common strategy that binary options traders use is to know when to choose call or put options based on the resistance lines. Generally, put options are purchased when a price tends to touch a resistance line where reversals from uptrends to downtrends are imminent, and call options are chosen when a price tends to touch a support line where reversals from downtrends to uptrends can easily happen.
Binary options traders know that a market, no matter how stable, experiences fluctuations throughout a day of trading, whether they are upward or downward. According to its peaks, traders are able to define what are the support points and resistance points. This makes binary options trading effective and successful.
Support and resistance points are not exact numbers, rather estimations. Nevertheless, most of these estimations are often proven correct, if not to say accurate, in terms of showing the relative price levels where reversals from a downtrend to an uptrend, and vice versa. Knowing these points will therefore allow you to achieve successful binary options transactions.
The trader will see the price of the binary option asset surpass the support or resistance prices. One will naturally think that these prices are useless. Patience and attentive observation of the next movements is crucial. The trader should note that the asset price has returned to the support or resistance level, and that this is only a simple reflex or false alert from the market.
Learn more from us. We have a complete line of help tips for every type of binary options trader. We also have a list of today’s top brokers. Check them out to start trading today.
Support and Resistance Zones – Road to Successful Trading
This Support and Resistance Zones Strategy will enable you to take trades exactly at the area price will reverse. Trading support and resistance lines are critical for every trader to implement into their system. In this article, you will learn how to calculate support and resistance, identify support and resistance trading zones, stock support and resistance approach to trading, along with forex trading support and resistance.
I am going to guide you every step of the way. Follow along as we cover support and resistance in forex, how to trade support and resistance in stocks, and how to trade support and resistance in options. This is a simple, easy to learn and easy to understand trading strategy. After you read this strategy, you will be able to identify these sweet spots where marvelous price action happens. So, keep reading and you won’t regret it. Also, read trading discipline which is an important skill for successful trading.
What indicator are we using for this strategy?
Indicators Used in the Support and Resistance Zone Strategy
Our indicators for this strategy will be price action and its relationship to Support and Resistance. to be honest, this is, in our opinion, the best way to trade support and resistance. So what exactly are these key areas? How to trade support and resistance levels? Before we explain the strategy we are going to define support and resistance. Here is another strategy called The PPG Forex Trading Strategy.
What is Support?
We have a specific article on this very topic so go ahead and read that here if you do not know what support or resistance is. Support is the level where price finds it difficult to fall below until eventually it fails to do so and bounces back up. It’s simply many traders making trading decisions at that level.
What is Resistance?
Resistance is the level where price finds it hard to break through to rise above it until it fails to and is pushed back down.
You should always suspect a reversal at Support and Resistance as there is a high probability that price action will reverse at those key levels. That’s because it already did that before in the past and it will continue to do so in the future as traders will always take caution on these levels. Some who had open trades will exit at those price levels and others will initiate new trades at these levels. That’s why it is crucial to learn to draw these Zones using technical analysis.
Steps for Trading Support and Resistance Zones Strategy
Now that we know the role of S&R Lines, which from now on we will call Zones. That’s because support and resistance are not a given line. If so, it would super easy for traders to know and every trader on the planet would have an entry order at that price.
They are more like zones that can be breached and pushed into. The trend may pull the price action back out of it, or maybe price action will succeed in breaking it for good. This is why you want to think of these points as zones.
Our main purpose in this Trading Strategy is to identify those Zones and use them for our favor and make great trade entries and exit points.
The First Step of the Support and Resistance Zone Strategy.
The first step of this strategy is drawing those Zones on our charts. This allows us to easily spot where the price would probably reverse. After you do this, it will resemble a support and resistance indicator only you now have zones to take advantage of. Drawing Zones on the chart is better done on a higher time frame so that we can examine the main reversal levels and the more critical points on the chart as a higher time frame shows us the bigger picture. It’s almost like what we talked about in our article about the importance of multiple time frame analysis.
We begin by drawing horizontal lines on recent Peaks and Bottoms like you see below in our chart example: Examine this chart as it is critical for you to understand these zones.
When you are doing support and resistance trading, a line with multiple touches is far better off as it is clear that it stood against the price and passed the test many times and it will continue to do so. WHY?
Because History always repeats itself and this continues to happen time and time again on every chart that you will ever look at. (Stocks, Options, Forex)
Note** Make sure to leave spaces between zones as drawing many lines will confuse you and worsen your trading decision. This strategy could easily be compared to our Red zone strategy that shows you how to draw zones on your chart.
When you take a look back after drawing Zones will find that those lines withheld the price numerous times before and will continue to do that numerous times more.
The Second Step to Identifying Support and Resistance Zones:
The second step is waiting for the price action to touch the Zone. What you can do is set your charts on 2 to 4 currencies and wait for your chance, as it may take some time for the price to reach the support resistance levels. The reason we say 2 to 4 currencies is because this is a good number of pairs to be looking at and will not overwhelm you. This allows you to have a good judge on your trade opportunity.
Basically, the higher time frame takes less time and attention than the smaller time frame. Alternatively, the smaller time frame has more signals as the zones may get hit more frequently. You have to be more focused if you’re trading small time frames.
In this chart we see the price action approaching support and actually almost touched the support so we wait to see the form and shape of the next candle.
If the price reverses that will be good, as it is what we are expecting. We will need a strong reversal candle though to assure that price will reverse and that it will not collapse back again.
On the other hand, if it breaks that level, it may be real breaking or a fake breaking. We also should see a strong piercing candle that effortlessly breaks that level to assure it will continue in the same way.
The Third Step for the Strategy Is:
The third step of this trading strategy is to wait for the candle which hits the zone to close. This will indicate the signal candle we are waiting for. Take a look at the candlestick pattern and ask yourself:
- Is it a bullish or bearish candle?
- Is it strong or weak?
- Big or small?
- Does it have long wicks or small wicks or no wicks at all?
When you can identify the kind of candle then you will be able to decide whether to sell short or buy long.
Knowing the type of candle is crucial to identify whether the entry is valid or not.
In the chart example above we see how Support rejected the price and pushed back up. We also see the candle that formed afterward to signal the end of the down movement and the beginning of and upward movement.
So how did we know it is strong, what it’s secret?
Before we go any further, here are some important factors in determining a strong candle. Because spotting that specific candle on zones makes the difference between winning trades and losing trades.
The Qualities of a strong candle are:
- Long body
- Formed after the previous touched the level but could not break it.
- Entirely taken the two previous candles.
This example shows us how a strong candle should look. As you can see, the strong candle overpowers the one before.
Here, you can see that those weak candles were not able to breach the Resistance line and had long wicks and could not break that level. So, we wait to see what will happen with the next candle. Will the price action break that level? Or will the resistance win and the price reverse?
On the first case ( the candle on the left that we marked for you): clearly, the price fell on the next candle which made it a valid reversal.
While in the second case ( the candle on the right that we marked): we had a very small candle which did not mean anything except that the resistance stalled the price for a while.
The Fourth Step to This Support and Resistance Strategy After You Analyze Your Zones:
The fourth step is to identify where you will enter the trade. You want this to happen at the pivot point or turning point. Here are the entry criteria.
Entry/Exit Criteria for This Support and Resistance Trading Strategy:
Your entry should be slightly above or below the signal candle which is the strong candle. This way you are adding more confirmation to your trade to make sure that the price will move towards the direction you expected it to move to.
Our stop loss should be placed on the other side of the zone and not too close to the level to give it some space. As we said, it is a Zone. Putting the Stop loss there makes sense because this is the end of the trade. The price is unlikely will reverse after that point.
So according to the rules of this strategy, below is an example trade:
We used a 3 to 1 RR but you can adjust according to your rules.
Now we have learned from this Support and Resistance strategy how to draw Zones and how to trade them successfully. We also learned how to determine the direction that the price will probably move to, so we could have a better edge in our trading.
If you liked this strategy or still need more information please leave a comment below and we will answer your questions!
Trading support and resistance, and discovering support and resistance zones are pivotal to your trading success.
Our Fibonacci channel strategy, and the Red zone strategy are very similar and will help you in understanding exactly what these so-called “zones” are as well so you can check them out also if you wish!
Thanks for reading!
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Support and resistance indicators: how to trade S&R in Forex
Support and resistance levels are one of the most important concepts in Forex trading. Many technical tools rely on support and resistance lines to find or to confirm trade setups, and they are probably one of the first tools that new traders learn in trading. Support and resistance levels can come in various forms, and there are even complete trading strategies which rely purely on these levels. Given the importance of this topic, we prepared a detailed article which covers everything you need to know about it and shows how to calculate support and resistance levels in Forex.
Explaining support and resistance in Forex
First, let’s start by explaining what support and resistance levels are. A support line in Forex refers to a level where the price had difficulties passing below, signalling that the price could again act as a barrier for sellers. Often, there are many buy orders located around important support levels, which is why the price looks like it is bouncing off those levels. In other words, that price level is providing “support” to the price.
A resistance level, on the other hand, is a similar concept to support levels except that resistance levels form to the upside. A resistance level refers to a price where the market had difficulties breaking above in the past, signalling that the same price level could again act as a barrier for the market to the upside. Traders often place their sell orders around important resistance levels, which can accelerate a downward movement once the price reaches the resistance level.
Many technical tools rely on support and resistance levels to identify potential trade setups. These levels are pure price action and are relatively easy to grasp and trade on, which is one of the main reasons why so many Forex traders swear on support and resistance trading in Forex.
How to identify support and resistance levels in Forex
There are various ways to identify support and resistance levels in Forex. While horizontal S&R levels are the easiest to spot, other levels such as round number psychological levels, trend line S&R levels, and Fibonacci retracements require certain tools for a trader to identify them. Here’s a list of the most important support and resistance levels in Forex.
- Horizontal support and resistance levels
Horizontal support and resistance levels are located horizontally in relation to previous support and resistance levels, making them relatively easy to spot. The following chart shows a horizontal support and resistance level.
Traders usually trade on a bounce from a support or resistance level or a breakout of it. A large number of sell orders located just below a resistance level and just above a support level makes those levels hard for the price to break, eventually leading to a bounce off those levels. On the other side, a break of those levels is usually accompanied by a large buying or selling momentum, as buy orders are located just above a resistance level, and sell orders are located just below support levels. Pay attention to this the next time you’re trading horizontal support and resistance levels.
- Round number support and resistance levels
Round number support and resistance levels refer to the psychological effect that round numbers have on market participants. Basically, when an exchange rate reaches a round number, such as 1.00, 1.10, 1.20, 1.25, 1.5, and so on, these levels often act as a support and resistance for the price depending on the side from which the price is approaching. This means that you can place your stop loss and take profit orders around round numbers, but also prepare for a potential bounce of the price off those levels.
- Trend line support and resistance levels
We have covered horizontal support and resistance levels and round number psychological levels, which are also a type of horizontal level. Now, it’s time to explain how trend lines can act as a support and resistance for the price.
Trend lines connect higher lows during uptrends and lower highs during downtrends, making them an important tool for trend-following traders. However, they can also be used to identify potential price levels where the price might bounce. Each time the price approaches a rising or falling trend line, there is a high chance that the trend line will act as a support for the price during uptrends, or as a resistance for the price during downtrends.
As the following chart shows, a trader could enter into a long trade when the trend line shows to provide support for the price and exits when the price fails to make a fresh higher high or when the price breaks below the rising trend line.
It’s important to note that for a trend line to be an important support or resistance line, the price has to respect the trend line at least three times.
- Fibonacci retracement levels
Fibonacci retracement levels are special types of support and resistance levels that aim to identify a price level where a market correction might end. Currency pairs have a tendency to trend, and every trend consists of highs and lows forming the characteristic zig-zag pattern of price charts. A market correction is a counter trend price movement which forms after a strong movement in the direction of the trend, and according to the Dow Theory, market corrections usually reach around 50% of the impulse wave.
Leonardo Fibonacci was an Italian mathematician of the Middle Ages who discovered the famous Fibonacci sequence of numbers. You may have heard about the Fibonacci sequence, which goes like this: 1,1,2,3,5,8,13,21,34… In essence, each number represents the sum of the previous two numbers. What’s even more interesting is that by dividing two consecutive numbers of the Fibonacci sequence, you’ll always get the same result: 0.618. This is called the Golden Ratio and occurs in many places in nature, including the human body.
Now, let’s get back to trading again. Since the Golden Ratio is widespread in nature, market participants feel that this ratio could also be successfully applied to financial markets. Traders consider that a market correction of 61.8% of the impulse wave could act as an important support and resistance level, together with other important Fibonacci ratios such as 23.6% and 38.2%. If you apply the Fibonacci tool from recent low to recent high, the resulting Fibonacci retracements drawn on your chart could act as important price levels where the market could bounce and return to its underlying trend. This is shown in the following chart.
As you can see, the price found support at the 61.8% Fibonacci retracement level on the EUR/USD pair. However, bear in mind that Fibonacci retracement levels don’t have to be exact and precise support and resistance lines. Instead, the price can retrace at so-called support and resistance areas, of which the most important are in between the 38.2% and the 61.8% Fib level. So, consider these levels as areas, or zones, and not necessarily as precise lines.
Support and resistance levels change their roles
When talking about support and resistance levels in Forex trading, we need to touch on an interesting characteristic of these levels, which is their change of roles. When a support level breaks, be it a horizontal, round number, Fibonacci, or trend line support, that support becomes a resistance level in the future. Similarly, a broken resistance level becomes a support level in future trading. A popular trading technique has been built around this feature of support and resistance levels, which is called pullback trading. Basically, a trader would wait for the price to retest a broken support level (which now becomes a resistance), or a broken resistance level (which now becomes a support) to enter into the direction of the breakout. This fascinating concept is shown in the following chart.
The chart above shows horizontal support and resistance levels on the weekly EUR/USD chart. Higher timeframes, such as the daily or weekly ones, are most of the time more reliable when it comes to support and resistance Forex trading. As you can see, the key resistance and key support lines are located above and below other less important levels, respectively. A broken resistance became a support, and a broken support became a resistance.
Final words: support and resistance levels in Forex
Support and resistance trading is an extremely popular way of trading the Forex market. These levels, which exist in other financial markets as well, are one of the most important concepts that novice traders should learn early on in their Forex journey. Simply put, a support level represents a price level where sellers had difficulties breaking below in the past, while a resistance level represents a price level where buyers had difficulties to breaking above in the past. As a result, these levels can be used to eventually predict the behaviour of market participants once the price reaches them again. There are many types of support and resistance levels, such as horizontal levels, trend line levels, Fibonacci retracements, and round number psychological levels, which have been covered in this article. Besides these types, other technical tools can also be used to identify potential levels where the price could find a support or resistance, such as moving averages (the 200-day MA is an important dynamic S&R level), channels, pivot points, and so on.
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