Binary Options Education

Binary options education1

Chapter 1 – The World of Global Trading

Successful trading is an art form. Successful traders focus on the art of trading. They invest wisely, because they understand the laws of trading. They know when to invest, where to invest and how to protect their investments. One of the most common mistakes made in trading is jumping right in to the market, without understanding where it’s going, and without knowing the signs that the market provides. It’s kind of like jumping into the water without knowing how to swim: the odds are against you.

Trading these days is done mainly in the short term, in what is known as day trading or aggressive trading, meaning that trades are bought and sold within a short time frame. Day trading is done with highly liquid assets, meaning that the value of the traded asset can change a great deal in a short time. This enables large, quick profits, and is therefore more attractive to most traders. Long term trading is called passive trading, and involves trading in time frames of months or years, in the hopes that the value of the invested asset will increase over time. Global trading is done by buying and selling various products. All of these products can be defined under the umbrella terms of assets, or financial instruments.

Let’s list the most popular financial instruments.

The first instrument is: Currency pairs

Currency pairs are currently the most traded assets in the world. They refer to the ratio between the currencies of two different countries. The first currency in the pair – the one on the left – is the base currency, while the one on the right is called the counter currency. In trades involving currency pairs, the trader buys or sells the base currency at the current market price, and then takes a profit or a loss according to the movement of the base currency relative to the counter currency.

In today’s market, not only currency pairs but also commodities and raw materials are traded, including metals such as gold, silver and iron, and agricultural products such as corn, coffee, rice and wheat.

A futures contract is an agreement which states that a certain product will be bought or sold at some time in the future, at a predetermined price. Oil has a potential for future profits, since as countries develop, the demand for oil grows higher and higher. The price of oil is mainly influenced by varying levels of supply and demand. Crude oil is the main source of energy in the world today, and has become more and more popular over the past 50 years among traders of various kinds.

Stock indices provide information about the performance of certain groups of stocks.

A stock index has a value that changes according to the total performance of the group of stocks represented by it. The index can be, for example, the weighted value of all stocks in the group. Indices can be invested in the same way as single stocks, with returns that are proportional to the change in the index.

Supply and demand form the foundation of economics To understand this principle, we need to understand that as demand for an asset increases, or as its supply decreases, the asset’s price will rise, and vice versa.

The following is an example that illustrates this principle:

Let’s say a farmer has 5 regular customers. Each day, his chickens lay 10 eggs. One day the chickens only laid 5 eggs, although the same number of clients wants to buy eggs, there aren’t enough eggs for everyone making his clients more willing to pay more for each egg, resulting in an increase in the price per egg. In other words, the supply decreased (less eggs), but demand did not decrease, resulting in an increase in the value of the eggs.

This can also go the other way around:

Let’s say that one day, the chickens decided to lay 15 eggs. So now, the supply has increased, but the demand remains the same. In order to be able to sell all the eggs, the seller must lower the price of the eggs. In other words, the supply increased, causing a decrease in the value of the eggs.

Demand is also subject to change – for example, if one day the chickens lay their usual 10 eggs, but fewer customers come to buy them. The seller may find himself left at the end of the day with unsold eggs, requiring him to lower their price.

In other words, the supply remains the same, but the demand decreases, so the value of the eggs also decreases.

The following is an example from the global trading market:

If a poor economic statistic is announced in Britain, many traders will want to sell the British Pound. In other words, the supply of Pounds will increase, resulting in a decrease in the currency’s value: a decrease in the value of the British Pound.

Another example: if a crisis in an oil-rich Arab country is announced, the price of oil will increase, due to fears that the supply of oil will decrease as a result of the sensitive developments in the region.

What is a binary option?

A binary option, meaning an option of either 0 or 1, is a quick and simple method of trading in which the trader has only two available options. The trader invests a certain amount of money and decides whether he believes the asset’s price will rise or fall during a predetermined time frame. If the trader is correct, he immediately receives the amount he invested, with the addition of his earned profit. If he turns out to be wrong, the invested amount will be lost. When trading on a simple, easy to use binary option trading platform, the maximum profit and loss amounts for each trade are displayed, along with a time frame for their expiration. Binary options are one of the easiest ways to trade. They enable the trader to earn high returns in short time frames, and therefore have become very popular among traders from all over the world.

Traders who make guesses without any advance knowledge can really only be called gamblers. Only when a trader has acquired knowledge of the market, can he actually be considered as making an educated, well-founded decision that carries a high chance of success.

This is exactly the purpose of this course – to provide you with the knowledge, rules and tools needed to succeed in this type of trading. Trading in binary options is rapidly becoming one of the most popular ways to invest, no matter what your financial goals may be. Whether you are interested in short-term investing, or aim to expand your investment portfolio, trading in binary options will suit you well.

The following are several concepts and components related to binary options:

In the Money – A financial term denoting that the option is profitable.

Out of the Money – A financial term denoting that the option is not profitable.

At the money – A financial term meaning the option expires at exactly the same level as it was at the time of the initial purchase, in this case the full investment amount will be repaid to the investor.Execution price – The asset’s price at the time the trade was executed.

Expiration price - The base asset’s price at the options’ time of expiration. This price determines whether the option is in the money, out of the money or on the money.

High – This option grants the trader holding it a profit in the event that at the expiration time the price is higher than it was when the purchase was made.

Here we can see the market price, if we think the option will expire in a higher price we will click ‘High’.

Low – This option grants the trader holding it a profit in the event that at the expiration time the price is lower than it was when the purchase was made.

Here we can see the market price, if we think the option will expire in a lower price we will click ‘Low’.

Touch/Touch Up/Touch Down – A type of option which grants the trader a profit whenever the asset’s price reaches or passes a predetermined level even once during its lifetime.

Here we can see the market price, if we think the option will reach the target price we will click ‘Touch’.

No Touch – A type of option which grants the investor a profit whenever the asset’s price does not reach or pass a certain predetermined level.

Here we can see the market price, if we think the option will not reach the target price we will click ‘No Touch’.

Inside Boundary – “Inside Boundary” options are binary options which grants the investor a profit when the asset’s value is within the predetermined boundary at the time of expiration.

Here we can see the market price, and the upper and lower target prices. If we think the option will expire inside the boundaries we will click ‘IN’.

Outside Boundary – “Outside Boundary” options are binary options grants the investor a profit when the asset’s value is outside the predetermined boundary at the time of expiration.

Here we can see the market price, and the upper and lower target prices. If we think the option will expire outside the boundaries we will click ‘OUT’.

Binary options exist for several types of financial assets, including forex, commodities, stocks and indices, and offer several advantages:

Simplicity – will the price close above or below? Binary options are easy to understand, and are traded with full transparency. The trader only needs to consider the asset’s market price. Limited risk and predetermined returns.
A binary option’s returns are predetermined and therefore the potential risk, as well as the potential profit are known in advance.

Binary options are adaptable to most of the widespread trading strategies and methods.

Binary options are issued 24/5. Traders have the option to trade at any time, since binaries exist for a wide variety of global assets, from stock exchanges throughout the entire world.

Advantages of the trading platform

All of our clients receive, free of charge, a variety of tools to help them to trade effectively and profitably. The platform is innovative, and offers clients an easy, intuitive way to trade in leading financial markets – including forex, commodities and indices. The trading platform is 100% online, which allows traders to trade immediately, from anywhere in the world, with no need to download or install any additional software. We combine an unparalleled variety of binary options and, using our breakthrough technology, offer speed and precision for a wide variety of trading arrangements.In the past, trading required a deep understanding of the financial markets and their complex lexicons. Our intuitive platform enables our clients to trade and profit immediately due to its simple trading process and user-friendly design. Our platform is optimized for online trading in binary options. Binary options are the quickest, most effective way to convert your financial knowledge into signification profits.

Chapter 2 – Trading Psychology & Capital Management

Psychology is a critical component of trading

Calm traders are better traders. The more emotional you are, the higher the chances that you will make mistakes while trading. The actions of trading are simple to perform, but are very difficult psychologically. The difficulty lies in accepting rules that don’t always seem logical, and in sticking to the rules strictly and consistently. Optimal trading is when your actions are completely disconnected from emotions, using rationality only; however this situation is practically impossible. So, want to know how remain calm while trading?

Join us for a lesson where we will learn about how psychology affects your trading, how to identify emotional states, and how to trade in the right state of mind.

Before I provide tips on keeping the rules, I will explain the difficulty involved by providing a quick explanation of the way the brain works. The brain is divided into two hemispheres: the right hemisphere, and the left hemisphere. The left hemisphere is the analytical part of the brain. This part is responsible for all things objective, scientific, logical, rational and intellectual. The right hemisphere of the brain is the part that is imaginative, artistic, intuitive, sensitive and emotional. It also lacks any sense of time. Therefore, each time we act logically, we are using the brain’s left hemisphere. The worst time to solve problems is when you’re using the right hemisphere – when you are experiencing an emotional storm.

Here is a simple, important technique that will help you to use the rational part of your brain and disconnect from your emotions. Your trading platform includes a display area that shows the current profit and loss status for your open positions. You must remove this information from your view at all times – simply ignore this display area, or remove it. The changing profit and loss display is the trader’s emotional barometer. The only thing that should interest you is the bottom line – the profit or loss at the moment of closing the trade. Don’t deviate from your strategy because of the displayed changes.

It’s important to know how to identify an emotional trader. When trading emotionally, you will be nervous and tense; you’ll sweat, and will be very hesitant. If you notice these symptoms occurring, stop everything. You cannot be an effective trader in this state. Get away from the computer, have a glass of cold water, make a strong cup of coffee, and try by all means necessary to disconnect from what’s going on in your computer at the moment. Music, meditation or a dance are also possibilities – whatever will help you disconnect and calm down. It might sound irrational to just go and leave everything in the middle of a losing trade, but you can’t influence the market trend, and you can’t take a calculated, logical action in this state, so best to relax, since only then will you be able to come back and trade effectively.

One of the most important rules in trading is to trade calmly and rationally. Don’t let your emotions take over and divert you from your chosen strategy. If you need to change plans, it’s very important to change them from a place of understanding and calm regarding your substitute plan, rather than from a place of fear and confusion. The indecision of fear is the best way to ensure repeated losses.

Traders tend to stay in losing trades because, as long as they haven’t exited the trade, the loss is still only “on paper”, and has not yet become “real”. The moment you leave the trade, the loss is realized, and the money is gone. Traders who know how to take real losses will be wise enough to exit failed trades early, and to plan and move on to other trades which have higher chances of success.

We all want to be successful traders. But success in trading depends a great deal on your mental attitude towards trading. Luckily, an “attitude” is not an inborn trait that stays with you for a lifetime – it’s something that can be changed. To succeed, you must avoid the traits that characterize unsuccessful traders. These include:

  • Spontaneity
  • Lack of confidence
  • Pessimism
  • Jumping from one technique to another
  • Impatience
  • Constantly being connected to the computer
  • Lack of capital management knowledge
  • Fear of recognizing losses
  • Trading with these traits will result in near-certain losses.
Your chances of success will increase considerably if you’re able to adopt the following traits:

  • Discipline
  • >Motivation
  • Optimism
  • Remaining logical and rational
  • Patience
  • Enjoying the trading itself
  • Knowledge of proper risk management
  • Independence
  • Calm acceptance of losses
  • These traits can turn trading into a fun game, where the chances of winning are higher.

To become a successful trader, you must:

  • Learn and understand the rules and principles of trading.
  • Learn how to manage your capital strictly and wisely.
  • Plan a trading strategy that is appropriate for the market condition, based on knowledge and technical analysis, which we will cover later in the course.
  • Try to reach a stage where the trading system is working for you.
  • Identify your weak traits, and work to overcome them.

Important rules that will help you psychologically:

It’s absolutely necessary to learn how to trade properly. If you’ve reached this lesson, you’re already on the right track. The information you’re learning will calm you down, and will give you tools to handle the situations you will invariably encounter.

It’s important to identify where your trading actions are coming from – the left or right hemisphere. If you are being emotional – stop everything, calm down, and only go back to trading once your hands have stopped sweating. Don’t stay glued to the computer – you probably have a lot of other things to do anyway, so take some time to take care of those as well. The market is constantly moving, whether you’re looking at it or not. Execute your trades according to the strategy you’ve created, and then go about your business.

2 types of investments

Each investment type includes the elements of chance and risk. Chance is the profit on your investment, and risk is the loss of some or all of your investment.

There are 2 types of investments:

  • Passive investment: in investments of this type, the chance is greater than the risk, but the returns will usually be low relative to the investment.
  • Aggressive investment: in investments of this type, the chance is lower than the risk, but the returns will usually be high relative to the investment.

Another important way to reduce risk is to distribute your investment over a broad range of trades. Proper, rational management of your finances, including distribution of your investments, will make the difference between a successful investment, which can be managed over time, and a failed investment, which will clear out your investment portfolio in no time. Proper capital management will preserve your capital over time, enable you to trade more calmly, and greatly minimize the damages you incur during losses, which are an inseparable part of trading.

As I’ve already said, losses are an inseparable part of trading. However, losses can certainly be minimized. Proper capital management focuses on keeping your losses low and your profit potential high. Statistics have shown that the maximum loss that an experience trader can allow himself to lose in a single trade, without harming his profit potential, is 5% of total capital. An investor who risks, say, 25% of his investment portfolio on a single trade, is practically ensuring that he will lose his entire investment portfolio after a short series of losing trades. Series of losing trades is something that happens from time to time to even the most experienced traders.

This mistake results from attempting to earn a large amount over a short period of time. Greed is the trader’s worst enemy.

Proper exposure management can be implemented based on one of two rules. Stable investment with low risks – using the strict 5/15 rule for risk management: 5/15 refers to the investment percentage in a single trade, relative to the investment’s percentage out of the entire portfolio.

For example, if an investor has a $10,000 account, he can allow himself to risk up to 5%, meaning $500, on any single trade, and up to $1,500 of the entire portfolio. In other words, if the investor risks $500 on a single trade, he can concurrently open a maximum of 2 other trades, at an additional risk of 10%. The total risk of all open positions must not exceed 15%.

Aggressive trading with high risk – this involves the more permissive 10/30 rule for risk management:

The more permissive rule allows the trader to risk up to 10% on each trade, with a maximum of 30% of the entire portfolio. This rule is intended for traders who prefer aggressive trades, or for traders with small accounts, in order to provide them a certain degree of maneuvering room.

For example, if an investor has a $10,000 account, he can risk a maximum of $1,000 on any single trade, and up to $3,000 of the entire portfolio. In other words, if the investor risks $1,000 on a single trade, he can open a maximum of 2 other trades concurrently for an additional risk of 20%, with the total risk of all trades being no more than 30%. In general, the permissive rule is considered to be the highest level recommended for risk management. It’s best to try gradually reducing total exposure down to the stricter level of the 5/15 rule.

The exposure management process leads directly to the next stage of the allocation management. In effect, the rules of exposure management dictate to the investor the size of the trades he can open.

For example, a passive investor with an account of $10,000, who manages his portfolio according to the 5/15 rule, can risk up to 5%, meaning he will not lose more than $500 per trade. If for example he places a stop loss order 100 pips from the entry point, the investor can open a trade of up to $50,000. Similarly, an aggressive investor who uses the permissive 10/30 rule will be able to risk up to 10%, meaning $1,000 per trade, and therefore will be able to open a trade of up to $100,000.

Chapter 3 – Market Analysis

There are two basic types of market analysis:

  • Fundamental analysis – This type of analysis tries to predict future market movements according to a country’s economic news.
  • Technical analysis – This method analyzes current market movements in comparison to past market movements. In other words, it tries to predict future trends using past movements, with the help of indicators provided by your trading platform.

Fundamental analysis evaluates the economic position of countries, and the ways in which economic news affect the value of their currencies and equities, or the value of the goods exported by those countries. The economic news published by a country’s economists has a great deal of influence over market movements. Since the USA is the largest economy in the world, it is very important to follow it.

Fundamental analysis is based on macro-economic data that is provided for that country or currency, where each country or economic block ie: Euro Zone, releases a number of particularly significant and important statistics every month. These announcements often have an effect on the currency’s strength. Below are a number of particularly important types of news announcements, which have a particularly strong influence, and usually cause very strong fluctuations in currency markets:

  • Gross domestic product
  • Retail sales
  • Employment/unemployment rate
  • Interest rate decisions
  • Minutes from the most recent interest rate meeting
  • Speeches made by influential figures in the market
  • IFO business climate survey
  • PMI- Purchase Managers Index
  • CPI- Consumer Price Index
  • ZEW- Sentiment Index (Relevant only in Europe)
Market announcements are indicators of an economy’s performance. Experienced traders know how to incorporate these announcements into their strategy. It’s important to note that, before an announcement is made public, forecasts for that announcement are made by experts. In many cases the value of the underlying asset reflects the forecast, but when the actual announcement differs from the forecast, the market can become much more volatile and interesting.

The following is an example which illustrates the effect such an announcement can have on the market:

On April 27, 2011, an announcement was made regarding a decision taken for the interest rate in the USA. The forecasts predicted a reduction of 0.25 percent, but in reality the interest rate remained the same. This resulted in support for the USD, as can be seen with the asset’s rise in value on the chart.

Technical analysis is the study and investigation of the market’s “behavior” using charts. Trading systems enable traders to analyze the market using various types of charts. Chart analysis requires the development of visual skills. To develop these skills, let’s first learn about the three most common types of graphs:

A line chart is the most simple and basic of the three types of charts. It is created by connecting various price units over a given time period. Each point only represents the closing price. The line connecting all the points creates a chart that helps to identify trading trends, as well as support and resistance levels.

Technical analysis usually requires more specific information than that provided by a line chart, so this chart is less appropriate for in-depth analysis.

A bar chart includes lines that present different price levels over a given time frame, distributed on a graphical diagram. These lines denote the following information:

High price – this is the high point of the bar, representing the maximum bullish power for that bar.

Opening price – displayed to the left of the bar’s body, representing the price when the bar opened. A bar’s opening price is usually identical to the closing price of the preceding bar.

Closing price – reveals the results of the fight between the bulls and the bears over the course of that bar. The closer the closing price is to the high price, the stronger the bulls’ victory over the bears over the course of that bar.

Low price – the low point of the bar, representing the strongest point the bears reached over the course of that bar.

The distance between a bar’s high and low points signifies the intensity of the battle between the bulls and the bears. A short bar indicates a calm, quiet market, whereas a long bar signifies a volatile, stormy market.

The Japanese candlesticks chart is similar to the bar chart in that it also represents the closing, opening, high and low points for that bar, but using a different display, which helps identify various trading patterns.

The difference between the charts is that, in the Japanese candlesticks chart, the closing and opening prices are enclosed in a rectangle.

The use of different colors illustrates the increase or decrease in price over the course of the bar. This is the most common type of chart.

The market movement is made up of three main series of trends:

Major trend – all the trends that appear in the weekly, monthly and yearly time frames. The major trend is a trend that has been going on for several months, and may continue for five years or more.

Secondary trend – all the trends that appear in the daily time frames. A secondary trend will usually continue for about two weeks, and may continue for up to half a year.

Minor trends – all trends appearing in the intraday time frames (from one minute to several seconds). Minor trends continue for at least a day, and may last from up to a month.

Several special terms have been created to describe concepts in the global trading market. The following are the most important terms to know:

Pip

This refers to the smallest possible movement in the market. In most cases, it refers to a change in the value of the fourth digit following the period.

Bulls and bears

Another important concept is bulls and bears, or bullish and bearish.

The terms “bear” and “bull” are thought to derive from the way in which each animal attacks its opponents. The term “bulls” comes from the fact that bulls ram and fling their victims upward, meaning that the bull indicates an upwards movement in the price. Therefore, a bullish trend is a rising trend – the prices move upwards. A bullish trend indicates a rising trend. A bullish candlestick is a candlestick that indicates a rise in price.

The term “bears” comes from the swipe motion made by bears, which goes from top to bottom, meaning that the bear indicates a downwards movement in the price. Therefore, a bearish trend indicates a downtrend. A bearish trend indicates a falling trend. A bearish candlestick is a candlestick that indicates a lowering in price.

The market moves in wave-like motions, rising and falling. When the market moves upwards for a certain period, it’s called an uptrend. Similarly, when the market moves downwards for a certain period, it’s called a downtrend. One of the most important tools in trading is the ability to identify the current trend in the market. We’ll go into trends in more detail later in the course.

Peaks and troughs

A peak is a candlestick that is surrounded on both sides by two candlesticks that are lower than its highest price. A trough is a candlestick that is surrounded on both sides by two candlesticks that are higher than its lowest price.

Support and resistance

The support level is the lowest price level that the market has reached. When a trough is repeated several times, a straight line can be drawn between the troughs. This line represents the support line. The resistance line is the opposite: a line that passes between the peaks reached by the market.

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Ranging occurs when the market price stays at around the same level, with very little change. In this situation, the support and resistance levels are very close to one another.

Breakout

A breakout occurs when a ranging market suddenly erupts into a dramatic rise or fall, which breaks through the previous support or resistance level, as can be seen in the diagram. Entering into a trade at the breakout point will usually result in high returns.

A B C D

The market is forever moving in waves. What goes up must come down, and what goes down will eventually rise back up. Rises or falls are never absolute: there’s always a “correction”, meaning that at the height of the trend, the trend corrects itself and tries to return to its previous value, and then the price continues in the direction of the trend. We mark the reversal points on the waves with the letters A B C D. These markings will serve as the basis for the various market analyses that will be performed. It is therefore very important to learn how to recognize them.

Chapter 4 – Basic Technical Analysis

As explained previously, technical analysis strives to identify recurring patterns, in order to predict future price movement. A technical analyst is guided by the market itself, and attempts to predict the future based on the past. He is not interested in the factors underlying the price’s behavior. Identifying the direction of a trend is one of the most important tools in technical analysis, and enables us to know which direction we should trade in.

First, let’s explain what a trend is. Well, a trend is a combination of waves that create the market’s direction. Trends do not move in a linear downwards or upwards direction. Rather, they are hidden “between the lines” of the chart, requiring us to identify them on our own. There are three possible directions a chart can move in: Up, down and sideways (ranging). We identify a trend using peaks and troughs.

  • Uptrend – an asset in an uptrend creates a series of increasingly higher peaks and troughs.
  • Downtrend – an asset in a downtrend creates a series of increasingly lower troughs and peaks.
  • Ranging trend – an asset in a ranging trend creates a series of peaks and troughs at price levels that are more or less identical.
It’s important to remember that, when creating the trend line, we can also use the slope of the trend to determine the trend’s strength. The steeper the slope is – the stronger the trend.

Trend ranges:

Long term trend – This trend is also called a major trend, and is measured in years. This type of trend controls the asset over the longest time frame, and is determined by fundamental factors. In order to identify a long term trend, we also need to find the medium term trend, since they both move in the same direction.

Medium term trend – This trend is also called the secondary trend. This trend is more sensitive than the long term trend, since it covers shorter time frames. This trend is influenced by economic factors, but to a lesser degree than the long term trend.

Short term trend - This trend is also called the minor trend. This trend is much more sensitive than the long term and medium term trends. The short term trend is the most volatile of all, and is mostly influenced by the day’s news.

Synchronization of all time frames - The most profitable trading opportunities arise when the trends of all three time frames are moving in the same direction. On this chart, you can see the long term trend, the medium term trend, and the short term trend. You can see that, at this point, all three trends are moving in the same direction, so the chances that the chart will continue moving in that direction are higher.

In order to see the full picture, we need to find the support and resistance levels.

The foundation of technical analysis rests on identifying support and resistance levels. Support and resistance are like a floor and ceiling that restrict the price movement from above and below.

A support level is a price level at which the asset tends to stop moving downwards, and then reverses direction and starts moving back up. The support level is represented in the diagram by a horizontal (or near-horizontal) line that connects several troughs. The more troughs on the same price level, the stronger the support level. Usually, when a breakout of a strong support level occurs, a trend reversal can be expected, with the price continuing to move in the direction of the new trend.

Support levels are created in the following cases:

  • Traders decide that the current price is attractive for opening a new long trade.
  • Traders decide that the current price is attractive for increasing the size of an existing trade.
  • Traders who sold the asset decide that the current price is attractive for realizing their profits.
A resistance level is a price level at which the asset tends to stop moving upwards, and then reverses direction and starts moving back down. The resistance level is represented in the diagram by a horizontal (or near-horizontal) line that connects several peaks. The more peaks on the same price level, the stronger the resistance level. The stronger the resistance level, the stronger the breakout will likely be when the price eventually does break through the resistance line. The start of a breakout is an excellent point to enter a trade.

Resistance levels are created in the following situations:

  • Traders decide that the current price is attractive for opening a new short trade.
  • Traders decide that the current price is attractive for increasing the size of an existing trade.
  • Traders who bought the asset decide that the current price is attractive for realizing their profits.
Support and resistance levels are displayed on the chart in different forms: horizontal and diagonal. Horizontal support and resistance levels – these are the easiest kind to identify. They are created when an asset moves up and down inside the same price range. A resistance level that gets broken through usually becomes a support level. The reverse is also true – a support level that gets broken through usually becomes a resistance level.

Diagonal support and resistance lines are more difficult to identify, and are created when an asset’s price rises and falls in a “staircase” pattern. In cases of an uptrend, these patterns create increasingly higher points and troughs, while in cases of a downtrend, the peaks and troughs become increasingly lower. Diagonal support levels indicate the trend’s direction. In order to obtain a particularly effective indicator, it is recommended that both horizontal and diagonal levels be analyzed together.

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