Support, Resistance and Trend lines
Binary options trading is similar to most types of directional trading in that an investor is looking at technical supply and demand levels to determine the future direction of an underlying asset. Trend lines, support and resistance measure specific supply and demand levels of price action and when breached, price action will generally continue in the direction of the breach.
Trend lines, support and resistance levels are generally subjective measures of price action, but there are a number of ways to create objective points that have historically shown significance.
Support is a level in which buyers are purchasing an asset. It is usually designated by low price points in a market in which traders purchased an asset believing the market will not move lower. Traders often use moving averages as well as horizontal and sloping trend lines to designate support levels. Support is generally seen as spots of demand where prices are having a difficult time achieving further downside.
A moving average is an average of price points in which incorporate a specific period of an assets price action. A moving average is calculated by adding all the price points over a specific period and then dropping the earliest price points as a new price point is added. In the example below, the 20-day moving average is a historical measure of the last 20 days at any period. On the 21st day, the first day is dropped from the moving average.
Another type of instrument that can be used to calculate support is a horizontal trend line. A horizontal point measures different low price points in which investors purchased an asset. When the horizontal trend line is breached, the market usually follows through on the downside.
Sloping trend line support is another type of support in which an analyst will look to attach a low with the next higher low, to generate an upward sloping trend line. When the upward sloping trend line is breached, the market generally declines in the direction of the break.
Resistance is a price point in which suppy is generally strong and prices cannot achieve further upward movement. When resistance is breached, prices generally move in the direction of the break. Similar to support, moving averages, horizontal trend line resistance and downward sloping trend lines are solid measures of resistance levels.
As seen on the chart above when horizontal trend line resistance was breached the USD/CAD continues to move in the direction of the market break. This was similar for both the 50-day moving average along with the downward sloping trend line that was created by the December highs and the April highs for the USD/CAD.
Trend line creation has been historically thought of as a subjective measure. Each analyst can create support and resistance levels by picking subjective high and low prices to use to create their trend lines. One way to objectively draw trend lines is to use Tom DeMarks, trend line points.
DeMark created his DeMark trend lines by using specific price points to find high and low points to create support and resistance trend lines. A summary of the DeMark trend lines are as follows.
To create a resistance trend line find the first high that is surrounded by 1 higher high on each side of the trend line. In the example below of the Australian dollar vs. the US dollar, an analyst would connect the high in mid June that was surrounded by one lower high on each side of it making it a DeMark pivot top.
The analyst would then look for the next high, which is higher than the initial high, which was surrounded by a lower high on each side of the high which would make that a second pivot top. The analyst could then connect the highs using a downward sloping trend line which would create a resistance line. When the resistance line is breached, the market generally continues in the direction of the break.
DeMark bolstered his pivot tops by making them more robust by looking for highs that were surrounded by 2 or even three lower highs. This process made sure that the pivot top was solid resistance.
To create support levels, DeMark created pivot bottoms. A pivot bottom is a low surrounded by at least one higher low on each side. An analyst would then connect the first pivot bottom to the next higher pivot bottom creating a upward sloping trend line that could be used a robust support.
DeMark bolstered his pivot bottoms by making them more robust by looking for lows that were surrounded by 2 or even three higher lows. This process made sure that the pivot bottom was solid support.
Binary option traders should use support and resistance levels for binary options trading. Trend line support and resistance levels make excellent pivot points which reflect break out price action within a market. These levels can be used as breakout points in which binary calls and binary puts can be used to trade the binary options market.
The most robust type of period to use to trade binary option is daily price points. Daily prices generally reflect a longer term period and a close above resistance or below support reflect market sentiment of the future direction.
Hourly price bars can also be used to trade hourly binary options, but they are generally not considered as robust as daily price points.