Any skilled investor is aware that areas of support and resistance are locations where the price has previously hesitated that have been projected into the future. They are also aware that these are the places in which a trader should either purchase call or put options, using information about how things played out in the past to make a sensible prediction about what is likely to happen to market prices in the future.
It is important for a trader to be aware that the true value of any technical analysis will always remain with dynamic resistance and support. This means that they need to look beyond the horizonal line to identify zones of resistance and support. For example, a particular trend line can offer areas of support and resistance and therefore places where they shouild buy put or call options depending on the rising or falling trend instead of the classic horizonal line.
When an investor looks at the levels of support and resistance, it is vital for them to understand that these levels do not just form on the horizonal line, but they can also be pivotal too. Some traders believe that if there is a rising trend in the market and it is possible for them to draw any type of trend line, even a channel, then the whole trend will have been completed by the time the trend line or channel has broken to the downside and therefore the market will be unable to form a new high. However this is a misconception and is incorrect. The market can form a new high, however it is not the start of a new move if the market cannot break the prior channel or trend line. As it is hesistating at that level, this represents an opportunity for a trader to place a put option, even if the market did make a new high.
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Using the Pitchfork Tool
Apart from channels and classic trend lines, there is another tool available for use in technical analysis that can identify these levels – the pitchfork. Simple to use, this tool is formed from 3 pivot points with each point representing respectively the lower median, upper median and median of the Pitchfork’s lines. The channel or channels that result are rarely horizontaly and therefore when the price heads to meet these trend lines it meets either a dynamic resistance or support.
These channels can help the trader to derive Fibonacci levels as well as the dynamic resistance and support levels for future market prices. In the case of a bullish trend, they should purchase put option at that level and purchase call options in the case of a bearish trend.
Scaling When Using Areas of Support and Resistance
Scaling means entering the market at different levels, for example taking a smaller size of trade to average better priceds for the option that would have been traded overall. It is vital to bear in mind that when trading binary options, the expiry date is a key part of the overall profitability of the trade, so calibrating the expiry date together with the timeframe as well as the dynamic resistance and support levels is essential. For example, if the levels form on a daily chart, a trader should no trade with an hourly expiry period as there is likely to be consolidation in that area of the market for an extended period, and consolidation with small expiry dates mean that trades are likely to fail. Instead, a bigger expiry date is a better choice, for example an end of week or month expiry date.
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- “Data‐snooping, technical trading rule performance, and the bootstrap.” The journal of Finance 54, no. 5 (1999): 1647-1691, Sullivan, Ryan, Allan Timmermann, and Halbert White.
- “Profitable candlestick trading strategies—The evidence from a new perspective.” Review of Financial Economics 21, no. 2 (2012): 63-68, Lu, Tsung-Hsun, Yung-Ming Shiu, and Tsung-Chi Liu.