The lines of support and resistance are those places on a chart that usually bring the price to halt and change its course. Those are the levels that cause the price problems with surpassing them. As a result, the price keeps on rebounding “from” those places.
A support line is the price level from which it usually does not drop. A resistance line is the price level from which it usually does not go higher. Please take note of the “usually” part, as there is no level of support and resistance which cannot be broken by the market.
An example of support/resistance levels:
A resistance level that has been broken automatically becomes a support level and the other way round:
How to define the lines of support and resistance?
A support trend line is formed when a securities price decreases and then rebounds at a pivot point that aligns with at least two previous support pivot points. Similarly, a resistance trend line is formed when a securities price increases and then rebounds at a pivot point that aligns with at least two previous resistance pivot points. Stocks often begin or end trending because of a stock catalyst such as a product launch or a change in management.
The levels of support and resistance (SR) are created in the highs and lows of the chart, but not only in those highest and lowest. In those places we draw horizontal lines. For instance, in a growing trend the preceding highs, which have not been broken by the price, are the lines of resistance and the preceding lows are the lines of support.
A broken level of resistance is automatically a level of support, and the other way round. The stronger the level of support/resistance, the stronger level of resistance/support it becomes.
It’s hard to recognize the differences between the levels of support/resistance at first, but with time it becomes intuitive and all you need to draw the lines that matter to you is to take a look at the chart.
Once you establish the levels they will also work in the future and in different time intervals, which is why it’s common practice to move them from the higher time intervals to the lower ones (e.g. from H1 to M5). We don’t move them from the lower to the higher time intervals as we’d have too many illegible levels.
Using two adequately strong SR lines we can establish the scope within which the price chart will be “restricted” upwards and downwards. Therefore, the line will “bounce off” those two lines in a side trend until a stronger price movement occurs.
The levels of support and resistance may be established in different ways, they can also be trend lines and channels of trend, average or Fibonacci ratios.
The more often a support/resistance level is “tested” (touched and bounced off by price), the more significance given to that specific level.
The strength of the SR levels
We can find multiple levels of SR in a chart, but only some truly matter. We should seek out those SR levels that are stronger at keeping the price. A strong support/resistance level is the one that has repeatedly prevented the price from going up or down.
To assess the strength of the SR levels we need to historically check how often a given level has supported/resisted a given price chart. The stronger the level of support/resistance, the higher the probability that the price chart will be halted at a given level and “bounce off” of it.
What is also important are the moments when the level is broken. We watch the real body of the breaking candle. If it’s big, the market needs a strong “bounce” to break past the level. The more often such strong breaks happen, the stronger the SR levels are.
Another factor indicating the strength of the SR levels are high open shadows that touch the SR lines.
Finding and analyzing the places where the trend is reversed is also helpful when assessing the strength of the support/resistance levels.
Below you’ll find an example of strong levels of support/resistance. The horizontal lines of support/resistance are in red, and the scope of the SR lines are in gold:
Support/resistance and binary options
Knowing how the support/resistance levels work highly influences the effectiveness of transactions and the success rate. However, the levels of SR are not enough to enter into transactions, which is why we strongly recommend seeking other confirmations, e.g. combining them with price formations.
As far as the binary options go, the levels of support and resistance are particularly important in strategies, such as Carlucci grail or Bollinger Bands. Additionally, using them in transactions that go with the trend increases the chances of success.
- in uptrends we use the support to open “call”-type options;
- in downtrends we use the resistance to open “put”-type options;
- in side trends we use the rebounds from the support/resistance (resistance – put option, support – call option).