Rebound and breakout
Support and resistance levels – are parts of a pair’s technical analysis with trend lines. Every binary options trader must be able to find and mark them on the chart.
You can use this strategy on a demo platform first till you become really good trader.
We briefly remind that support and resistance levels are important historical price levels at which significant events took place: the beginning of a new global trends, deep correction, etc.
How to trade support and resistance levels?
Let's look at the chart for example. We consider GBP/CHF hourly chart and note the closest level (in this case it is resistance).
As you can see, this is quite a strong level. We see that the price bounced twice from this price level. So, with a prologue let’s find out how to trade using support and resistance levels? It's very simple. Binary options trading can be divided into two types: rebound from the level and breakdown of the level. We take into consideration these two types a lot.
Rebound from price level
As the name implies, in this case, we will buy an option hoping that the price will not break the level and will unfold. Many traders buy binary options strictly at important price levels. Such trading approach is wrong, because technical analysis is not exact science, and it is impossible to identify the specific price level up to a point.
Therefore, it is necessary to wait for confirmation of a rebound from the level in the form of completely closed candle below important price level. It would be better if this candle has a long body. Let’s consider the trading at rebound from the level of the same GBP/CHF currency pair.
We see on the chart, the price is touching the red resistance level and a bullish candle with a long body closes directly at this level. Is it a signal for Put option deal? No, because there is no evidence of level breakout, nor rebound. We are still waiting for the next hourly candle closing.
Then we see that the next bullish candle also does not give us a clear signal. It is only after another hour, when we see that the market determines the direction (bearish candle with a long body). At the close of that candle, traders should buy a Put option with expiration time of 3-4 hours.
Price level breakout
Unfortunately, support and resistance levels do not always become an insurmountable obstacle for the price. Very often a breakdown of these levels occurs. Rules for trading at the breakdown level are similar to that on the rebound, but in this case we are waiting for the signal candle to close above the resistance level.
The figure below is an example of the same GBP/CHF pair, where you can see how the candle closes fully above the resistance level. It serves as a signal for Call option buying with the same expiration term – 3 or 4 hours.
It is important to know that market ‘feels’ these levels, and that these levels may stop movement or begin a new movement. It is also important to remember that when you open a transaction on the rebound or breakout of important price level, there are other factors affecting the price, such as technical (trend lines, reversal patterns, continuation patterns) and fundamental ones.