Okay class, today I'm going to teach you all about support and resistance levels (you lucky dummies you), and how to capitalise on them when trading binary options. Recognising and using support/resistance will be one of the best-loved and most-used tools you will have in your fundamental analysis toolbox. You should get the hang of how they work and become proficient at quickly spotting them whenever you look at a chart. Trust me once you get this you will start observing support and resistance in the most unlikely and ridiculous places.
Right so let's begin with support. You know how when you look at a chart of an asset's price action there seems to be a point beneath which the price seems reluctant to drop? Right, well this point is that asset's support level. You can imagine this as a type of floor that the price has difficulty getting lower than.
Now for resistance. Resistance works in the opposite way. It is the ceiling beyond which your asset is finding it difficult to break through. So your support line is drawn underneath the price action, and your resistance line is drawn above it. The point is that the price action should move within these two points. Of course this rarely ever pans out as simply or as easily as just drawing lines on a graph, but when you do manage to correctly identify an asset's support and resistance lines the trades you place can really kill.
Of course neither support nor resistance levels are set in stone. As in, the lines you identified today will not be as useful to you tomorrow. They vary from trading day to trading day and even at different times during the same day. Basically the timescale you chart your asset at will reveal differing resistance and support levels. It's best to be monitoring your asset at the timescale that you're intent on trading. So don't be viewing your EUR/USD graph at the monthly timescale if you're intending on placing 60 second trades. Makes sense right? Cool.
Now in order to determine your support and resistance levels you want to draw a line along the bottom and top of the asset's price action respectively. This line obviously moves from one side of the screen to the other even though, unless the market is completely flat-lining, you can expect the support line you draw to be moving more along diagonal lines rather than horizontal ones. Now a good rule of thumb for developing a support line is to monitor your asset after you have drawn it. If the price dips and rises three times failing to break either of your lines then this is a reasonably good indication that you have correctly identified a support level and that you can now begin to trade using it.
Binary trades and support/resistance are a marriage made in heaven. This is because the magnitude of the price change doesn't affect your trade. So once you know that the price is likely to stay within the bounds you have draw in at least the short term, then you can begin placing CALL trades when it touches your support and PUT trades once it touches your resistance. Okay my my little binary bunnies, you can now hop along and go play with support and resistance. Have fun!
George Milios is the founder of onlineforextrading.net, the binary options and forex news portal which is dedicated to providing you with all the information you need to successfully trade.