SUPPORT AND RESISTANCE

The idea of support and resistance is one of the oldest concepts in trading. Price support refers to an area on a price chart that price cannot seem to sink below. In economic terms, support is really the concept of demand. Prices cannot fall below a certain level when there is demand there. Price resistance refers to any area on a price chart that price cannot seem to rise above. In economic terms, resistance is really the concept of supply. Prices cannot rise above a level where there is too much supply.

The proper use of support and resistance in trading involves traders buying an asset when the asset’s price nears an area of support. This is because prices typically stop falling and start rising when they hit support. Conversely, traders plan to sell an asset when its price reaches an area of resistance because prices typically stop rising and start falling when they hit resistance. Binary option traders can use this knowledge in their above/below trading to help set price targets and plan their trades.

There are several different methods that traders use to identify support and resistance on price charts. Some traders contend that whole numbers act as natural support and resistance levels, such as an on-the-dollar price in a stock (like 10.00 USD as opposed to 10.15 USD) or 10,000 in the Dow Jones market index. Fibonacci percentages are often used as support and resistance lines while following trends. Trendlines drawn underneath uptrends are often used as support; trend-following traders buy as price falls back to touch its trendline. Trendlines drawn above downtrends are often used as resistance; trend-following traders sell as price rises to touch its trendline. Channel lines can be used to the same effect.

Several binary option trading strategies can effectively utilize support and resistance. Primary among them is the above/below strategy that requires a trader to know the direction of price.