Resistance and support levels are widely used instruments to create trading strategies for all kind of investments. In binary options, they are a very important factor in the decision making process of any successful trader.
Therefore, they should be a part of your trading, too.
A resistance level is created when prices have not been able to rise above a certain price level for at least two times. As a trader, you have to assume nobody is willing to buy this asset above this price.
This means prices cannot rise any further unless traders change their opinion. The more often an asset has already tried to break through a resistance level, the more valid it becomes.
Continue reading the article below the table…
How to trade resistance and support levels
Once the market gets close to a resistance that has been confirmed a few times, you should stop investing in rising prices. The resistance will probably keep prices from rising; and, even if prices break the resistance, they will at least get more erratic the closer they get to the resistance level. On the other hand, when such a well established resistance level is broken, you can relatively safely invest in further rising prices, as this event should generate a big bullish price movement.
Once a resistance level is broken, it can, and most likely will, turn into a support level. Support levels work just like resistance levels, only the other way around: They keep prices from falling under a certain price level.
As trader, you should handle them exactly like a resistance level: Do not predict falling when the market is getting close to a support level. When a support level is broken, it can turn into a resistance. Sometimes one price level switches between being a resistance and a support level multiple times.
As you can see in the picture, support and resistance levels are almost never an exact science. Most of the time there is not one definite price that creates the resistance, but a price range. Sometimes, this makes it hard to determine when a resistance or a support level is broken.
To solve this problem, you can look at the momentum prices are moving with: Usually, a support or resistance level is broken by the market creating big candles and moving strongly in the direction the direction the resistance or support level kept it from. On the other hand, be careful when you see resistance or support levels broken by a Doji or any other candlestick formation indicating a turnaround.
In this case, a market turnaround is very likely. As with any market phase, a solid understanding of candlestick formation helps you judge these situations correctly and make better investments.
Sometimes, resistance and support levels can form around psychologically important levels. When indexes approach a new round number that has never been broken before, for example 500, 3000 or 10,000, when stocks reach $50.00 for the first time, or when the Euro is trying to break $1.50, many traders realize how far the trend has already taken them. They get weary and take their profits, which generates supply and lessens demand. This makes it hard for the asset to break through the psychological barrier.
In market phases like this, trends usually resume their main trend line, for example. On the other hand, once the resistance is broken, there will be a lot of new demand that will turn the resistance into a support. Once again, this mechanism works both ways.
Any trader should know how to recognize resistance and support levels, as they are an invaluable ingredient to any successful trading approach. Only traders willing to take the most risk can afford to trade their signals in spite of approach resistance or support levels. Most times, however, this trade-off is not worth it.
From here we also recommend: Pivot Points