For unexplainable reasons, assets develop a trend, and then reverse. For some traders, they view price movement as a random walk, while others view an asset’s price movement as going through a channel to a critical point at which the price movement reverses. These critical resistance points are known as support and resistance numbers. The movement of the preceding trend will probably continue once the price of the asset has retraced to one ratio number. The use of these numbers is widely known as “Fibonacci retracement”.
This technical trading tool is based on a sequence of digits identified by mathematician Leonardo Fibonacci in the thirteenth century. His sequence of numbers is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Each number in the sequence is merely the sum of the two preceding numbers and this sequence continues infinitely. A significant feature of this sequence is that each number is approximately 1.618 times greater than the previous number. This unifying feature between the numbers is the basis of the common ratios utilized in retracement calculations. The trader, using this tool, will take two extreme points, a major peak and trough, on the stock chart and divide the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. Usually, the trader will use the key Fibonacci ratio of 61.8%, also referred to as “the golden mean,” which is found by dividing one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179. This then allows the trader to identify possible zones of support and resistance by drawing horizontal lines.
Since the market is fluctuating all day, the trader looks for these support and resistance points to make binary option trading as profitable as can be. When the market is trending upwards, this trend is also called a “Bull Market.” Yet as the market advances, assets reach a point of resistance and drop, forming a peak known as the “resistance point.” The opposite exists when the market is in a downward trend, known as a “Bear Market.” The price of the asset reaches a lower level, and then retreats. This low trough is called the support trough.
An important point to remember is that when the trader calculates numbers, they are in reality estimations of a zone which have proven themselves many times to be accurate. These zone calculations will allow you to trade profitably binary options. However, remember the trader does not see the market perform as an exact science, but as a forum of probabilities. The experienced trader sees a level of support, but suddenly the asset falls further. Yet within the next moment, there is a retreat, and indeed, the price returns to the expected support level. The movement was only a simple reflex or false alert from the market.
So how does one know if the supports and resistances are accurate enough to establish your binary option trade? Many traders think that the support or resistance is broken once the price of your binary option asset has surpassed it, but unfortunately this is not always the case. In the situation where an asset drops past support, remember to view that point as an indicator of a zone and not a specific number. Charts are especially helpful in identifying zones, and focus on the overall picture and not on individual peaks and troughs. Extreme fluctuations may be merely reflexes of the market with no real significance or impacts on the price of your binary option trade.
By studying the support or resistance numbers, don’t focus on the market’s reflexes, but seek its’ true intentions. When you examine a chart, seek the binary option asset’s lines of support and resistance. Yet, the true intentions can suddenly change due to news, and the resistance price turns into the support price during the next “bull run” upward. If the market tests the support or resistance levels many times without breaking them, it strengthens the trend. Trading is an “art” and not a “science.”With enough experience, you will be able to find the “true” support and resistance zones intrinsically by yourself. View charts over 15 minutes, ½ hour, and one hour. Each has their own features, and different features highlighting support and resistance zones of the binary option assets you will be trading.