Thanks to the technological development that took place in the last 20 years technical analysis had become more popular than fundamental analysis. That is true for binary options as well, traders using technical analysis on a constant basis. However, most of them do not manage to understand it and make some painful mistakes. In this article, we’ll try to explain some basic concepts of technical analysis and some of the information included here will contradict the one that you already know.
What is technical analysis?
Technical analysis for binary options is basically studying the evolution of price in the past, in order to stop recurring patterns and anticipate the future direction of price. In order to apply successfully the technical analysis principles, you will need a certain mindset.
With technical analysis you will spot some recurring patterns, you will find that the price reacts to some areas in the same way. This brings into discussion support and resistance levels.
What is a support level?
A support level is a place on the chart where buyers had placed their buy order in the past and influenced the price so it started to rise. If you look at any binary option chart, you will find these levels, where buyers had reacted several times.
The key issue on the approach to support levels is that traders see it as a line in the sand. The price won’t react exactly to the level. Sometimes it will pass through it and only then will start to rise. You need confidence when trading binary options and in order to build it, you will need to understand properly what exactly a support level is.
What is a resistance level?
As opposed to a support level, resistance is a level where sellers have placed their orders in the past and that led to a certain price dropping. The same principle applies to resistance levels. You need to see resistance as a zone, not just as a thin line on the chart.
Also, if there are many rejections off a particular level, that makes it stronger, since buyers/sellers had managed to limit the upside/downside.
Hope we managed to help you understand better some key principles of technical analysis- support and resistance levels. Make sure to apply them when trading binary options, as they can really be very effective.