BO202 Lesson – Learn how to use Support and Resistance to make money trading Binary Options Video & Transcript
Welcome to the second video in our Binary Options 200 training course. This is Binary Options 202: Support and Resistance. The Welcome to the Support and Resistance Master Class, in this video, and the next video, I will teach you a lot about support and resistance– and how to use it to trade binary options. Support and resistance is one of the most widely concepts used in financial trading. Support and resistance are areas in the market that when price reaches, price reverses. And I’ll go into more detail of this, as this video goes on.
So, support and resistance is used to identify potential areas of price reversals, and just like any trading concept, indicator, or training tool, support and resistance is used to speculate where future price is going to be. There are various types of supports and resistance. In this video, and in the next video, we’re going to cover three– horizontal support and resistance, dynamic support and resistance, and trend support and resistance.
So, let’s define the word support, and the word resistance. The very basics of support are areas within financial markets where price changes from a bearish direction– or bearish bias, to a bullish bias– or bullish direction. The very basics of resistance are areas within financial markets where price changes from a bullish direction, or bias, to a bearish direction, or bias. And as this video progresses, you will learn a lot more about support and resistance, and how it is used in financial trading.
Horizontal Support and Resistance. Horizontal support, or horizontal resistance, are horizontal areas within financial markets where price will change direction. I have a diagram of a horizontal support. Price is bearish. But when it reaches the support area, it changes from a bearish direction, to a bullish direction. So, price reverses.
A horizontal resistance area is a horizontal area within financial markets that changes price from a bullish direction, to a bearish direction. Once again, from my diagram, price is bullish. Once we reach the horizontal resistance area, price becomes bearish. The easiest way to remember the difference between support and resistance, is support is active under price, and acts as a floor for price. Whereas resistance is active above current price, and acts as a ceiling for price.
The strength of horizontal support and resistance– and for any support and resistance, for that matter– is determined by the amount of times the support or resistance is tested, and continues to change price direction. So, we have a horizontal support on this bottom diagram. Price is bearish. It reaches the support area, it becomes bullish. Price comes back down to test.
The horizontal support, once again price changes direction from bearish to bullish. The support area is tested a third time, as price comes down. A third time price changes direction from bearish to bullish. And a fourth time, as price is rejected repeatedly, this could be considered a strong support area. Notice how I’m saying support and resistance areas– rather than levels– as support and resistance is generally not a specific price or level in financial markets, but a general area.
So, let’s look at some horizontal support and resistance on real-life price charts. This is the EURUSD, it’s an hourly chart. And on this chart, we have a good example of resistance in financial markets. You’ll notice that price comes up to this area. It comes back, goes to the area again. Comes back, goes to the area again. And finally goes to resistance area a fourth time before completely being rejected.
If we draw a trendline to mark this area, we could identify this as strong resistance. Price is rejected four times. This is a daily chart off the FTSE 100, the stock index for the United Kingdom. And once again, we have a good example of resistance. Price is rejected here, here, and again here. If we mark this area with a horizontal trendline, you can see this rejection more clearly. If I zoom out, you will notice that this resistance area has acted as resistance in the past.
We have one rejection, two rejections, three rejections, four, five rejections, and possibly a sixth rejection. This is an example of strong resistance in financial markets. This is a 30-minute chart of the US Dollar, Swiss Franc. On this 30-minute chart, we have an example of horizontal support. Price has been rejected, four times, on a support area.
If we mark this, we have a horizontal trendline, it should be more clear. We have four clear rejections. One, two, three, four. How can we trade supports and resistance? Just as recommended in the video previous to this one– which was about Fibonacci retracement– once we recognize this support, it may not be wise to just place co-options when price reaches this level. But, instead, to look for a signal of a pin bar, or an engulfing candle.
If this support has acted as supports in the past, we may have noticed this first rejection on our screen, and we have a pin bar– a small body, with a long wick. That’s our signal to start placing call options. The pin bar is also followed by a bullish engulfing candle, and price goes on the upside.
The third time this support is tested on this 30-minute chart, is here. We have a very strong, clear pin bar. That’s our signal to start placing call options. We also have another pin bar here, and a bullish engulfing.
The fourth time this support is reached, we have another clear pin bar, and price shoots on the upside– another signal to start placing call options. And that’s where trading is the same with resistance, looking for bearish pin bars, and bearish engulfing candles on clear resistance levels. Now you know the basics of horizontal support and resistance, let’s look at dynamic support and resistance.
Dynamic support and resistance is created by moving averages. And just like Fibonacci retracements, dynamic support and resistance works because it’s self-fulfilling, because so many traders– professional and retail traders– use dynamic support and resistance as part of their training. On my diagram, I have a moving average. As price comes to test this moving average, price is rejected, turning from bearish to bullish. And it is rejected a second time, turning bearish to bullish.
So, this moving average could act as a dynamic support when trading financial markets. Let’s look at dynamic support and resistance on a real-life price chart. This is a 30-minute chart of the pound against the dollar. I have a moving average on my chart, set at the period of 100. Price is up-trending, and our moving average acts as dynamic support. You’ll notice that price pushes, and when it pulls back, we have a clear rejection, and a bullish pin bar. And then price goes for another push.
Later on, this dynamic support is tested again. Price is pulling back, price is rejected, we have a bullish pin bar, followed by a bullish engulfing candle– and price goes for another push. It changes direction. And a third time, this dynamic support is tested. Price is pulling back, it’s very much short-term bearish. The dynamic support is reached, and price changes direction.
This is another chart of the Great British Pound against the US Dollar. This time we have a daily chart. And our moving average now acts as dynamic resistance. Price moves bearish, pulls back to this moving average area. We have a bearish pin bar, a bearish engulfing candle, and price moves strongly on the downside. Once again, price comes up, is rejected, and changes direction. And the third time, and a fourth time. One, two, three, and four.
How can dynamic support and resistance be traded? Just like horizontal support and resistance, we can look for pin bars and engulfing candles that agree with the price reversal. So, we’re very dynamic resistance, we’re looking for bearish pin bars, and bearish engulfing candles. For dynamic supports, we’re looking for bullish signals. We have a bearish pin bar, and a bearish engulfing– signals to place puts– and price moves heavily on the downside. We have two bearish pin bars, more signals to place puts. At bearish engulfing, another signal to place a put.
Obviously, support and resistance is not always going to hold. Eventually, it’s going to break. So, no matter how strong a support or resistance area is, it is not going to last forever. In this diagram we have a clear resistance. Price is rejected two times, but is eventually broken, and price moves strongly on the upside. We have a dynamic support on our second diagram. Price is rejected twice, but eventually broken.
So, what happens when supports or resistance is broken? More often than not, a resistance level, when broken, will then become a support, and a broken support may become a resistance. If we go back to the original concept– that supports are flaws, and resistance areas are ceilings– think of supports and resistance as a block of flats, or apartments, where ceilings become floors, and floors become ceilings. As we move up the block of flats, or apartments, and pass ceilings, they become our floors.
If we’re on the ground floor, we have a floor, and a ceiling. When we’re on the first floor, our previous ceiling has now become our floor. And the same works for support and resistance. If we’re coming down the block of flats, or apartments, then floors can become ceilings. So, when a support is broken, it can become a resistance.
Let’s look at this once again, on real-life price charts. First of all, let’s stick with our example of our dynamic resistance. Price was rejected four times– one, two, three, and four. But let’s look further along this chart, to see what happens. You’ll notice that the resistance is eventually broken. Price is closing well above the moving average, and this dynamic resistance has now become a dynamic support. The moving average acts as support here, here, and here.
This is the FTSE 100 Index. It’s a daily chart, and once again we have an example of resistance turning support. This change of floors becoming ceilings, and ceilings becoming floors. We have a dynamic resistance. When this is eventually broken it acts as dynamic support. This is the US Dollar against the Swiss Franc. We have a clear, horizontal support– one, two, three, and four– but is eventually broken.
If we move the chart forward, let’s see what happens. Our support turns resistance one rejection, two rejections, three rejections– and moves strongly on the downside. So the question always is, how can we use this in our training? My personal opinion is that if a support or resistance is broken, is wait for the pullback. Wait for a signal– such as a pin bar, or engulfing candle– and then place calls or puts, to whatever agrees with the newly formed support or resistance.
In the next video, I will teach about Trend Support and Resistance. So, please continue watching, and please check out our recommended brokers by going to binaryoptions.education/brokers. Or by watching by Binary Options, 1 or 2.