Understanding Support and Resistance levels in Binary Options Trading
If properly understood and plotted, support and resistance are the perfect parameters to help a trader understand the growth progress of an asset. If you are a beginner in trading, first understand what support and resistance levels are. If you are well versed in binary options trading you would probably already know the significance of the support and resistance measures.
Support and Resistance – what they actually mean
If you are carefully watching the trade of an asset, there might be certain levels on the charts above which the prices might have difficulty increasing. This is the resistance level. The level that prevents the downtrend of the value is the support level. This is just a rough definition of the terms. The support level is where a many buyers come in and the resistance level is where a lot of stock owners sell their stocks.
When for a particular stock, there is a fall in the price and there are several traders investing in it, the price might not fall further. This, then, is the support level. And similarly when a high-priced stock is bought by a lot of people, and if the stock is considered to be overvalued, then it might lead to the stocks being sold. This would be a resistance level, preventing the stock value from increasing beyond a price.
Where to draw the resistance and support lines?
Broadly speaking, the support lines are at the lowest points or the valleys in the chart and the resistant lines are at the highest points or the peaks. But a valley would remain the lowest point only if a number of traders consider it a lower limit. Without the majority traders’ support, the prices might fall further below and it might eventually not be a support level. Similar is the case with the resistance line as well.
Japanese Candlesticks are the perfect type of chart to read the trade pattern and draw the support and resistance lines. Each type of trader would look for a different time period candlestick chart. For a single day trade, the trader could use the minutes or the hourly candlestick.
Longer term traders, looking to invest in a stock for a longer period should analyze a longer period chart. Figure out the highest and lowest and highest points on the chart; better yet, look for the highs or lows that have been touched more than once in the chart. Those points would be better measures of the support level and the resistance level.
Why these levels really matter?
For the buyers and the stockholders the chart with the resistance and support lines can give a rough picture of the ideal entry or exit time. A support level would indicate the right time to buy a stock as the stock has possibly reached its lowest price and might not fall below. A resistance level would indicate the time when the stock is overpriced and thus its prices might soon start falling. The resistance level is the right time if you decide to sell a stock.
For the market analysts, the resistance levels would show that the stock is considered overpriced by several traders. The support level would have been another downtrend point if the necessary support had not been received. For a peak or valley to have a support or resistance line there should be many traders having the similar opinion on the stock. This depends on both, the market and the buyers and these both are strongly interlinked.
Thus, analyzing the support and resistance lines is a good measure to gauge the market trend and to understand the traders’ preferences.