Binary options trading is all about predictions. Correctly predicting the price movement of an asset can take your trading game a level up. But if your speculation is incorrect, you will end up losing all the traded amount.
When traders enter the binary options market, they think speculating the asset’s price movement is easy. But that’s not true.
To begin with, the binary option is a volatile market. That’s because multiple factors affect the price of an asset. So, keeping track of the price without proper market knowledge or strategy can hamper your trading game.
One of the easiest and profitable trading strategies is the binary options breakout strategy. You can use it to limit the risk and to stay in the market for a long time.
But to use this strategy, you need to understand how it works? What are its different elements? What are different breakout patterns and most importantly, how helpful this strategy is? Luckily, this post has got you covered!
What is Breakout Strategy for Binary Options?
Breakout trading strategy is a period of stagnation in the trading market. In this situation, the market begins to consolidate on certain positions. These are the positions that later become support and resistance.
When the market is consolidating, you must keep an eye on the price level. If the price falls beyond a certain level, then that level is called support. However, if the price goes above a certain level, it’s known as the resistance level. The best thing is that one can quickly identify these levels in the trading chart.
Once you have found the support and resistance level, you can further understand a few possible situations. First scenario is the asset’s price touching the support or resistance level but not breaking them. You can call this situation as price testing the levels.
The second possible scenario is where the price rises above or goes beyond and breaks through the support or resistance level. This results in breakout in the trading market. But there’s a catch. Certain times, the price shows fake-outs, which makes people lose the trade.
So, when you notice a breakout in the market, it’s essential to confirm it. Once the breakout is confirmed, you can enter the market. But remember that when a breakout and a new trend are formed, the support and resistance level get reversed.
For example, if the price of an asset breaks the support level in the downward direction, then after a new trend is formed, that level becomes the resistance level. Similarly, if the price breaks the resistance level by moving upwards, it becomes a support level.
Therefore, it is crucial for traders to understand the market correctly, follow the charts, and keep track of price fluctuations. This way, you can spot a confirmed breakout and use this strategy to win a trade.
Underlying theory of Breakout Strategy
Traders who enter the market using binary options breakout strategy always remember its underlying theory. The theory of this strategy depends on two things.
First things first, you must find a breakout in the chart. For this, you should understand how to identify support and resistance levels. If you are a long-term trader, you must also look for potential breakout points in the market.
Next, you need momentum for a breakout to make successful trades in the market. This step is generally seen as the implementation of the first step.
An important thing to remember is that having a strong market volume is essential despite identifying strong breakout levels. That’s because, during low liquidity, a trade is likely to be unsuccessful.
Besides these, the third underlying theory of breakout strategy is timing. It’s essential because, without proper expiry time, you cannot make successful trades.
Entry signal
To use a breakout strategy for binary options trading, you only need a simple chart to identify entry levels. For this, look for break levels. Break levels are the point where the market can become a new price range if breached.
If the price of the asset goes beyond a certain level, it creates a break level. And if the price continues to follow the same direction, it’s seen as a strong level that is ideal for trading.
Trade timing
Identifying break levels means nothing if you cannot trade the assets at the right time. Deciding the expiration of binary options contracts is a simple theory, but it is equally confusing.
Thus, take some time to determine how strong the move is. And also, what expiration time of contracts will be profitable.
Elements of breakout
Breakout in the trading market indicates the price movement in a sudden direction. It can happen due to a variety of factors, which includes:
Volatility
Volatility in the market happens when either the buyers or sellers are heavily in action. It can sometimes lead to unstable market situations, and often times, it increases market volatility.
When a market is highly volatile, the possibility of price moving in a particular direction is also high. Thus, it results in a breakout.
Market participation
Just as increased volatility is essential, the heavy volume also plays an important role. When the volume of an asset is high, long-term and short-term traders get interested in it. As a result, they take a position in the market to win a considerable payout.
Directional move-in price
Imagine a situation where both market participation and volatility of an asset are high. This scenario can cause directional move-in price. During this time, a breakout occurs in the market, from which you can gain profitability.
But if there is no directional change in the price, a market breakout would not establish. That means there will not be any favorable trading situation.
Ways to identify a breakout
One of the best things about binary options breakout is that you can quickly identify it. Here are four ways to spot a breakout without any hassle.
Support and resistance
Identifying a breakout in the market through support and resistance is simple. That’s because it’s a technical way of spotting a breakout. Standard technical support and resistance levels includes Moving Average, Bollinger Band, Pivot Point, and Fibonacci Retracements.
Market consolidation
Market consolidation is a common occurrence that indicates indecisiveness. The trading market can either go up or down during this period, depending on the trader’s actions.
Chart patterns
Analyzing and understanding trading charts is a crucial skill that traders must-have. That’s because charts help in knowing the market and identifying potential breakouts.
Periodic news releases
Lastly, news releases related to the asset also act as a catalyst in moving price. After a news release, buyers and sellers come into action and make quick decisions.
Different breakout patterns
Understanding breakout patterns plays an integral part in using breakout strategies for trading. So, here are some common patterns that one might see during breakout periods.
Symmetrical triangle
When two trend lines meet after a breakout in a significant direction, they form a symmetrical triangle. Among the two lines, a downward trend results in a resistance line, and an upward trend forms a support line. This pattern shows the indecisiveness of the market.
Ascending triangle
An ascending triangle in trading charts shows the formation and continuation of the bullish pattern. An ascending and a horizontal line form this triangle, where the horizontal line is drawn on resistance points and ascending line on support points.
Descending triangle
It’s the situation that shows the continuation of the bearish pattern. The resistance line as a descending line and support line as a horizontal line forms this triangle.
Pennant
It’s a trading situation that indicates the continuation of a trend in the same direction. Here, two lines are formed by upward or downward trends, and they meet at a set point.
Flag
It’s a sloppy rectangle pattern that one can notice when support and resistance lines run parallel until there is a breakout.
Wedge
A tight price movement between support and resistance line forms a wedge. It can be either a rising or falling wedge depending on price movement and other factors.
When price breaks through resistance, a downward wedge is formed. Similarly, when price breaks support, it creates an upward wedge.
Useful Breakout Strategy in trading
There are only two ways you can use his trading strategy no matter what trading indicator or tool you are combining it with.
Long duration Options
For long-duration options you have an advantage because you don’t have to wait for the market to form a trend. You can exit anytime between 4 hours to 1 day.
Short term Options
For successfully trading short-term options, you can use tools that are required for 60 seconds of trading. The ideal time to exit the market for short-term options is between 5 to 30 minutes.
Advantages and disadvantages of Breakout Strategy trading
Breakout trading strategy for binary options trading can increase your chances to win a better payout. But this strategy also has certain limitations. So, it would be best if you use it after analyzing all the factors.
While breakout trading strategy limits the risk, offers better profit, and helps in trade management, it can also lead to false breakout and slippage.
Conclusion
Like any other trading strategy, breakout strategy also allows traders to improve their game. It’s a less risky way of entering the market. But it’s essential to confirm the breakout before taking any decision as the false breakout is a common occurrence.
Creating a trading strategy for breakout and false breakout will help you stay prepared for any situation. Also, you can use the right trading tools to avoid making errors.
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