Using Support and Resistance in Binary Options

What are Support and Resistance Levels?

Support and resistance levels are key areas where the price action of an asset can experience a stall in a downtrend and uptrend respectively.

In other words, it is likely that in a downtrend, sellers of an asset are more likely to exit their positions at a support level, causing prices to stall and reverse at those areas. In an uptrend, it is likely that the price action which is being driven by buyers of an asset will stall at a resistance because many of these buyers will exit their positions at those levels.

support and resistance levels

Drawing Support and Resistance Levels:

Support and resistance areas can be formed in the following ways:

a)    Psychological: This is when traders use prices which are rounded off to the nearest zeros are used as profit targets for trades, causing those areas to form supports or resistances because of the sheer volume of orders which use those levels as their exit targets. Examples of psychological areas of support and resistance are when prices end in 00, such as 1.5000, 93.00, 1.4300, etc.

b)    Pivot points: The daily pivots which are calculated using the previous day’s high, low and close figures can also form the basis of support and resistance. The trader may opt to use the manual calculation or may use automatic pivot point calculators which plot these points on the chart and recalculate them automatically on a daily basis.

c)     Recent highs or lows: Areas where prices have serially made recent highs or lows can be used as good parameters for gauging support and resistance levels, with recent lows forming supports and recent highs forming resistance.

Now that we have an idea of what constitutes support and resistance, we can safely illustrate how these levels can be used in the binary options market for support and resistance trading.

Use of Support and Resistance in Binary Options Trading

For the purpose of binary options trading, pivot points and areas where prices have made recent highs and lows are the best options to use in determining resistance and support areas. By the time the automatic pivot calculator has been used to plot the support and resistance areas, traders in the binary options market can use them to trade the following binary options trade types:

a)    Call/Put – Learn more about the Call/Put trade type

b)    Touch/No Touch – Learn more about the Touch/No Touch trade type

c)     Some varieties of the Boundary trade.

Call/Put Option

resistance level call put

The Call/Put option can be traded using support and resistance areas. 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 if the price retreats from a resistance.

The challenge usually occurs when there is a market trigger than drives prices to break through these key levels. That is why the safest bet for traders is always to wait to see if the candlestick will bounce off the key levels of break through them. Bounces off key levels are more likely to occur if there are repeated tests of these key levels. A test is defined by the price action touching a key level of support and resistance but not breaking through it. The more times a support or resistance is tested, the stronger it becomes. So for the Call/Put trade type, the trader must wait for that level to be tested. If the break fails, then the corresponding trade can be placed in the opposite direction.

Touch/No Touch

Since prices in a trend will generally keep moving there until they get to a key level of support or resistance, a price located close to these levels in the direction of the trend can be used as a strike price for the TOUCH trade type, while a price located away from the trend can be used as a NO TOUCH strike price.

The second component of this trade is to set the expiry. Usually the time frame chart can be used to estimate the time it will take the asset to get to a particular price, and the expiry time can be set using this benchmark. It will take some experience to be able to detect how to set expiries that are accurate most of the time.

Boundary Trade

The automatic pivot point calculator is the best tool to use for detecting boundary trade opportunities using support and resistance. The pivot points located above and below the market price can be used to set the price limits for the boundary trade, and the appropriate variety of the boundary trade type set according to what is on offer on the platform.

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