The principal purpose of technical analysis is to identify trends, supports and resistances that can either be tested or broken. These levels can then serve as entry points for binary option traders.
Asset price trends and binary option trading strategies
A trend can be defined as the general direction of an asset price. These trends can be uptrends, downtrends or sideways and may vary in length. An uptrend consists of a series of ascending peaks and troughs that rise successively. A downtrend consists of a series of descending peaks and troughs that fall successively. Markets that are in a sideways trend are often called “range trading” and feature a series of roughly level peaks and troughs. Markets actually spend up to 33% of time in this state.
Technical analysts draw trends on candlestick charts by linking the successive highs or the successive lows of an asset price. These trends represent the general direction of the asset price and can be used to identify pivotal points. Indeed, when a trend is broken, the asset price is likely to move strongly in the opposite direction of the preceding trend. When successive highs and lows of an asset price chart draw two parallel lines, it forms what technical analyst call a channel. A break of a channel bound would imply a strong move of the asset price in the direction of the break.
Supports and resistances: Buying and Selling opportunities for binary option traders
Supports and resistances are graphically formed by horizontal lines on which an asset price has bounced at least more than two times. These levels represent the virtual fight between buyers and sellers of the asset. Asset prices are likely to pull-back on a resistance level and to bounce on a support level. Nevertheless, if one of these levels break, the trend of the asset is likely to accelerate in the direction of the break. An asset price that breaks a resistance will accelerate its uptrend move while an asset price that breaks a support will accelerate its downtrend move.
How to use supports and resistances for binary option trading?
Binary option traders will wait for an asset to bounce on a support before buying a bullish binary option on this asset. They will also wait for an asset price to pull-back from a resistance to buy a bearish binary option on this asset.