It is time to learn another big factor in the binary options technical analysis – the levels of support and resistance. The matter will be getting a bit more complicated the more we progress in our study of the fine art of technical analysis and trading as a whole, but fear not because we will do everything in our power to make sure that everything is explained properly and without any questions left unanswered. So what are support and resistance?
Support and resistance are two terms we use to describe key points where the levels of supply and demand start to coincide. As you probably already know, the prices on the market are dictated by the levels of supply and demand.
When the supply is high, the prices tend to fall, and when the demand rises, so do the market values. Everything is interconnected in a vast, complicated economics machine and every little cog can have a direct or indirect impact on different aspects of the mechanism.
This is an important point to remember because it will help answer many of the questions you may have about how support and resistance work and why do they matter. Another note we would like to address is the fact that sometimes the terms supply, bearish, bears and selling are used as synonyms. In the same way, the terms demand, bullish, bulls and buying can be used as synonyms. If you happen to read something about bears and bulls in the same context, then it probably has to do with selling and buying. But enough introductions – what are support and resistance and what do they have to do with supply and demand?
What is support?
As we’ve already established, market values are driven by the levels of supply and demand. When a market value of an asset is relatively low but there is a high enough demand to prevent it from decreasing any further, we have a support. This is easy to imagine – as the price of an asset drops, more people are willing to buy because of the lower prices (hence the demand increases). However, with lower prices, sellers are less inclined to sell. The support is the level where the two trends meet. However, it is quite possible for a support to be broken after it has been established for one reason or another. If the sellers are willing to sell at even lower prices, for example, then the level of the support has to be decreased a new support needs to be established.
Where is support established?
In a vast majority of the cases, supports are below the price of the asset at the moment, but it’s not unheard of for a security to trade at financial values near the support level. It’s sometimes difficult to establish the exact support levels due to the inherently complicated nature of technical analysis. It’s quite possible for prices to go below the set support for a brief period which makes matters even more complicated because in some cases the support doesn’t follow alteration protocols if the price closes 1/8 below the constituted level. This is when the so-called “support zones” come into play.
What is resistance?
Resistance is the polar opposite of support. If the price of a security is relatively high but the supply
levels are high enough to prevent it from rising any further, then we have a resistance. Even though the price is a bit high, buyers are still willing to make purchases. The level of resistance is established where the two trends meet. The idea in the end is that the result will be higher supply than demand, thus preventing the eventual rise of the price any further. Just like with support, it is quite possible for the trend to be broken, signaling that the buyers are more willing to make purchases even though the price is high. In this case usually a new resistance has to be established.
Where is resistance established?
Just like supports are usually below the current price, resistance is above it. However, it’s common for a security to trade at financial values near the resistance levels. Everything we’ve said about supports holds true about resistance, only on the other side of the spectrum. Sometimes it’s possible for the trend to broken for a brief moment, but if the price closes 1/8 about the established resistance level, then the resistance will not follow the standard alteration protocols. This is where “resistance zones” come into play.