When it comes to trading binary options, one of the more common approaches undertaken is to look for direction indicators. The levels strategy takes a very different approach and attempts to predict the price movement of an asset by looking at price channels and finding stability in the support and resistance lines within those channels. This can be very effective, but it is an advanced technique and will take some time to get the hang of. Let’s see how it works.
How Should One Apply this?
As mentioned above, this trading strategy needs to have a few factors in place before you can apply it. You need to have a reliable measure on the support and resistance lines of the asset. These are the prices at which the asset has historically stayed between without breaking out of for a prolonged period of time. “Prolonged” can be an ambiguous term, but it really means that the asset should be contained in a range for a period far longer than the expiration timeframe of the trade you are looking at. If you’re looking at day long trades, this means a week or more. If you’re looking at 60 second trades, you should probably have a range of at least 24 hours. This is all variable, though. The actual numbers are dependent on the asset and its current volatility and momentum.
The channel mentioned above is the area between the two levels. This is where the bulk of the action on your asset will take place. When the asset drifts up in price to touch the resistance point, it’s very likely that it will then drop immediately as traders realize that’s a high point. Place a put option when this happens. This can be inverted for support. When the price touches the support line, it will be likely to increase in price, so get ready to go long with a call.
This strategy is particularly strong because you can use it in any direction with binary options. Once a support line is touched, you can place a trade for a call option. Once the resistance line is touched, you should place a trade for a put option. These should typically be short term trades if the asset has a high volume, as most binary option brokers carry. Ideally, these shouldn’t be stretched out for much longer than 10 to 15 minutes. In some cases, you will even want to go down as low as 60 seconds.
What Can Go Wrong
For one, the levels strategy relies upon candlestick charts, and many traders are unfamiliar with these. Spend some time associating yourself with this charting method before you attempt to learn this strategy. Another drawback of this particular strategy is that it only works if the asset’s price stays within the level that is found. On first glance, this can be extremely misleading as lines and prices on a chart will not give you the answer to this. You will need to do some outside research beyond the chart to ensure that nothing is going on that could influence the price outside of the channel.
You also need to ensure that your channel representation is accurate and that your levels of support and resistance are going to hold up. This takes an experienced eye and requires more than just looking at the graph and superimposing what might look like the most obvious support and resistance points. Many traders use this for 60 second trades, and it can be quite effective here, but you cannot just bang out trade after trade with this. Each one needs to be well thought out, and that will limit the number of trades you can and should make each day.
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