Everyone knows support and resistance areas are places where price hesitated in the past, projected in the future and in those places we should look to buy call or put options as what was happening in the past is giving us a fair idea about what is going to happen in the future.
However, people are looking at these support and resistance areas only on the horizontal, but the true value in any technical analysis stays with dynamic support and resistance.
What does it mean? Well, a specific trend line may offer support/resistance, or, in other words, places to buy call and put options based on a rising/falling trend, not on a classical horizontal line.
When looking at support and resistance levels it is vital to understand that they are not forming only on the horizontal but they can be pivotal as well. If market is in a rising trend and a trend line can be drawn, even a channel, then by the time the channel or the trend line is broken to the downside it means the whole trend is completed and market cannot make a new high. Right? Wrong.
Market can make a new high but that it is definitively not the beginning of a new move if market is not able to break that previous trend line or channel. The very fact that it is hesitating at that level represents enough for trading a put option even if in fact market made a new high. This is what the term “dynamic” represents.
Pitchfork
In technical analysis, besides the classical trend lines and channels, there is another tool one can use in identifying these kind of levels: the Pitchfork. Both Metatrader and Jforex, the most known trading platform for charting the currency markets are offering this tool and it is quite simple to use. It is formed out of three pivot points and these points represent the basis for the Pitchfork’s lines: median, upper median and lower median. The resulting channel/channels is rarely being horizontal and therefore when price is coming to meet those trend lines it is meeting a dynamic support or resistance.
Moreover, Fibonacci levels can be derived from those channels and other support and resistance levels can be seen on screen and they are too dynamic support and resistance levels for future prices. Needless to say that in a bullish trend we should buy put options on such a level and in a bearish trend we should buy call options. In this way, trading with dynamic support and resistance levels is nothing but trading with a contrarian opinion and this is considered to be a risky thing to do.
The reason for that comes from the fact that market will be in an overbought/oversold area most of the times when dynamic support/resistance levels are met. For the trade not to be that risky, it is recommended that for the first time the level is met the trading size to be not that big as the regular trading size and scaling may be a feature to use.
Scaling
Scaling represents going into the market at different levels, with a smaller size trade in order to average a better price for the overall option that would have been traded in the end after all. It is important to remember that in trading binary options the expiration date is vital in the overall profitability of the option one trades, so calibrating the expiration date with the time frame the dynamic support and resistance level appears is key.
In other words, it makes no sense to trade with an hourly expiration date or less if the levels are forming on the daily chart as market may consolidate in that area for quite some time and that consolidation means that binary trading there with small expiration dates is poised to failure.
Instead of doing that, looking at bigger expiration dates may prove to be the right thing to do as end of month or week expiration dates are also being offered by binary options brokers. It is not like one has to wait one month for the option to expire in the money but more like one or two weeks if the option is taken in the second half of the month.
After all, binary trading is offering more than 75% rate on investment in most of the cases so there’s no real reason why not waiting for a week or two or even a month for the option to expire. Human nature is the worst enemy to trading ability as the desire to acquire quick profits often overcomes the understanding that any quick profits are rather the outcome of luck and chance than trading.