Support and Resistance Levels is one of the most dominant trading strategies out there. The dynamics of the binary options market today have extended beyond brokers trading assets and currencies; though in essence, this is what truly happens at the very basic level of trading news releases, external lagging variables have clouded the strategy and simplicity behind trading.
Due to this reason explicitly, many seasoned and experienced traders have reverted to simpler forms of technical analysis when conducting trading. With binary options trading, the stakes tend to peak as high as “all or nothing”. Only brokers with higher levels of expertise can master such volatile and unstable markets successfully. Though it may seem as if they refer to countless charts, lagging variables, or software; a trader steering the art of price action trading does not need anything more than a few choice price charts, and careful analysis.
What is price action trading?
Price action trading is a minimalist form of technical analysis. It strips the process of trading down to the bare minimum requirements, and hinges on a close study of previous price trends.
Price action focuses on the movement of a security’s price. This movement is mapped out via simple charts, such as candlestick charts. The analysis of these charts is coupled with conscientious reading in points of inflection, trends and consolidations, support and resistance levels.
Because this is a strategy of binary options trading, the brokerage hinges mostly on how market participants and forces react to global trends or occurrences. These reactions create patterns which price action traders can study and employ to draw new levels of support and resistance, and then locate key points to trade from. Price action trading is hence based on reading clues, and marking out key levels on trending charts based on them.
Price action traders do not require excessive amounts of data to carry out successful trading; price history and trends are enough to make decisions and calls. Different traders read charts differently; this makes the technical analysis – even in its rawest form – entirely subjective. This method cannot be mistaken for being easy. Though it is inherently simple, clean, and minimalistic, it takes a certain level of experience and analytic reading skills to effectively master.
How is price action trading carried out?
With the help of a simple black-and-white candlestick chart, and other basic raw data, a trader can focus on past price movements. The trader will also focus heavily on areas of support and resistance.
Support and resistance levels
Support and resistance levels refer to certain barriers that prevent a price or financial instrument from moving in a particular direction. Drawing these levels accurately depends on the currency pair of choice, and how it correlates with the financial instrument in question.
A stable, appropriate level of support and resistance is one which does not allow a sudden bullish hike, and neither does it allow a bearish drop. Making sure that a trader can firmly harness the volatility of a market during high-pressure events is the key in such trading. As such, ensuring that the currency pair coasts at a stable level towards a bullish momentum is far better than an unprecedented hike or drop. Candles play an important role in locating key areas of resistance, or identifying retrace strength. However, these are analyzed when reading trends in relation to currency pairs or financial instruments.
It is important to note that levels of support and resistance do not occur in exact numbers.
Furthermore, whether or not a level of support and resistance breaks could determine whether an area of resistance switches to an area of support, or how price action traders read future price charts.
Reading inflections and swings
Once the key areas of support and resistance have been correctly drawn using previous price data trails, price action traders can focus on finding a point of confluence. A point of confluence is nothing more than a junction where two lines or variables join.
Accurately locating support and resistance levels relies on reading past data, and then pinpointing trends and inflections. Does the market have a tendency to move in a particular direction? This can be answered by noting whether a market has a directional bias to trend or consolidate.
If a currency pair follows a trend, it is quite simple to identify swing or retrace levels. Price action traders identify what indicator a trend is leaning against; trend line, Fibonacci levels, or a dynamic average? Reading comparative trends is the second definitive step in profitable price action trading.
Once price action traders have charted out support and resistance levels, and then gone on to read which way the market has a directional bias to swing towards – they can begin to take positions. Traders can now decide when and where to enter positions and make trading calls.
Traders then make a ratio of risk to reward. Reading past trends, are there more or few candles at the top of the trade? Fewer candles means less resistance has been encountered in the past, making it a safe position to enter.
With the formation of a bullish candlestick pattern, price action traders can execute call orders at the key levels of support. When carrying out binary options trading, brokers can use the touch or no-touch methods. This means they can take positions and call orders either right when or before the price of the underlying asset surpasses the predetermined barrier levels. The more expert brokers can carry out the no-touch option of calling orders based on past analysis of candlestick patterns.
The advantages of price action trading
- It is free; no expert advisors and no additional software is required. Traders can make do with simple candlestick charts and raw data
- This method can work in any market; oil, futures, stock exchange, currencies, etc
- It is flexible; the analysis relies on individual interpretation. Free from external variables, the trader can analyze in a simplistic, non-crowded manner
- It is fast; lagging variables, nor old data will strongly obstruct current trading
- The method is simple; indicators are easy to read and identify, and analysis does not hinge on several factors, but only a choice few.