For a considerable period now, traders from various pats of the world have been using binary options trading strategies that focus on breakout. The main idea behind these strategies is to identify the range or price level that a current price will probably ‘break through’ as it approaches the trading range. As such, you need to identify the probable breakout level, anticipate for it and enter the market once the direction of the breakout has been confirmed.
The Theory behind Binary Options Breakout Strategies
An effective breakout trading strategy entails two main aspects. The first aspect is identifying a more appropriate breakout level. The stronger the chosen level is, the more likely a trader will be to experience a strong move. As such, you should come up with comparatively strong market levels (break points’). Some of the levels that have proven to be more successful are the ones that have previously offered resistance/ support.
The other critical aspect for the breakout strategy to work is the market momentum; to succeed, you require sufficient momentum in the market. In this regard, you need to trade during periods of low liquidity or towards the end of the market. This is when the market volume is stronger; hence more likely to succeed. The other critical aspect in this regard is timing. Timing the expiry of your trades well will allow you to avoid whipsaws and pullbacks that may arise due to the break.
Entry Signal
As complicated as breakout trading may sound, it is actually simple. All you need to carry out this trade is a simple chart. In this regard, you need to come up with an entry signal. With the char, you should search for the possible break levels, the point at which the market is likely to enter a new price range. If the asset price goes beyond this point, we assume that the break has occurred. As such the momentum will continue pushing the price in the break direction. As such you should open a trade after the break has been confirmed and make the prediction in the break direction.
Timing the Trade
While predicting the correct breakout point may be rather simple, it may be a bit hard for traders to ascertain the price of an asset at the expiry time of the open trade. For trades using CFD’s Spread Betting or Spot Forex trading, this should be comparatively easy. This is because such traders can identify the levels to take profit or book pips along the way. However, you need to be very careful while trading the High/Low binary options. Specifically, you have to be precise on how strong you expect the move to be and your preferred contract expiry time. The main guideline here is that the higher your timeframe is, the more likely it is for the move to stick.
An Example of a Breakout Trading Strategy
Currency pairs tend to have more opportunities for breakout trading, as compared to other binary options assets. Additionally, currency pairs present the levels of volatility required for breakout trading. As such, we will focus on currency pairs in this example. Suppose you are trading the GBP/USD currency pair and the chart shows that the pair has been trending within a certain range for a particular session.
You need to identify the top of the trading range of the currency pair. This is the level that, if broken should lead to plenty of follow up momentum at that particular time. With this in mind, you can safely open a trade.
However, you need to ensure that you establish market levels that will see a strong momentum after the break. This momentum should be able to push the price in the direction of the break by the expiry time.
Key Considerations
- Come up with levels where you think large stop orders will build up. This will trigger and accelerate the move as the price is pushed towards the levels by the momentum. This way, the price will be propelled into a new trading one, away from the breakout level.
- In addition to adhering to correct timing, you also need to identify the right market to trade. As mentioned earlier, currency pairs are more volatile; hence better suited for breakout trading. This is because this strategy requires an asset that presents a significant amount of movement over the set time frame.
- You should avoid anticipating for the break too early; hence fail to wait until it confirms.
- Defining the breakout level will be influenced by the type of asset you are trading and the length of the trading period.
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John certainly knows what he’s talking about. He graduated from California State University in 2008 with a Master’s Degree in Investments and Securities. Since entering the world of work, he’s continued to put his degree to use. He’s spent over a decade working in the investment banking sector and thanks to his foresight, skills and education, he’s in a prime position to offer help to others looking to start investing.
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