Binary Options Trading Strategy for Beginners: Support and Resistance

At the first glance binary options trading seems pretty straight forward. While there are several types of binary options, the most popular one is the digital option. With digital binary options, traders either place a PUT or a CALL option with their binary options broker. If the trader placed a CALL option and the price of the instrument is above the entry price when the contract expires, the trader wins. On the other hand, with a PUT option, if the entry price remains above the market price when the contract expires, the trader wins.

Regardless how simple it appears, veteran binary options traders know how difficult it is to predict the directional movement of any Forex pairs, let alone knowing if the price will stay above or below a certain level.

Introduction to Support and Resistance

While there are many advanced binary options technical analysis methods to predict both the direction of the price of Forex instrument, using support and resistance levels can help binary options traders determine the probability of whether the price will stay above or below a certain level.

One of the key concepts behind support and resistance is the order flows in the market. For example, When the price of a Forex pair goes above a certain historic important level, a lot of traders feel comfortable placing their stop loss below this level, and vice-versa. In effect, these stop orders accelerate the prevailing momentum in the market when the price finally touches or comes around these pivotal levels.

In contrast, other traders keep buying above these levels or keep selling below these levels. As they feel that there are ample orders in their direction to “support” the price level or act as a “resistance” to the price from going above these levels.

Example of Support and Resistance

If we consider the following example of the AUD/USD during 2014, we can see that there is a certain invisible force that kept the price above a certain level once it penetrated above that level. Then again, when price managed to penetrate below these same levels, it stayed below these levels for a considerable amount of time.

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Interestingly, you can also observe that a resistance turns into a support when price penetrates it from underneath and the same resistance turns into support when price penetrates it from the top.

On March 26, the AUD/USD price closed above the 0.9200 level, and this event turned the 0.9200 level into a support zone. On May 2, when the price came close to this support level, it quickly bounced. Subsequently, the AUD/USD price tried to penetrate below this support zone, but failed to do so until September 9.

Once the AUD/USD price penetrated below the 0.9200, it had no trouble closing below it on September 10, which turned the 0.9200 support into a resistance. On September 11, the AUD/USD price tested the high of the previous day. However, the bears took control of the market and the AUD/USD price accelerated downwards until reaching below 0.8900 in a rush.

As you can see, the 0.8900 level acted as a support for the AUD/USD back in March 3! Which turned into a resistance when price tried to penetrate above it on October 9?

Trading Binary Options with Support and Resistance Strategy

If you have placed CALL orders on the AUD/USD on May 2, after seeing that the pair respected the 0.9200 level on April 3, you would have made a great trade with sufficient risk to reward ratio. The same can be said for placing a PUT order on October 9 or October 29. If you take the time to explore the example chart, you can find that using the simple support and resistance strategy, you could easily find more than a handful of trading opportunities on the AUD/USD alone.

While no market analyst or binary options guru can predict with 100% certainty that the price of a Forex pair will remain above or below a certain level, and for how long, support and resistance levels can help binary options traders increase their odds of winning.

Asif Imtiaz

Financial Analyst

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Asif Imtiaz

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