Let’s Look at Support and Resistance Again
The goal to using a binary options breakout strategy is to place yourself in position to trade and profit from price reversals. Typically, prospective breakouts are watched closely by traders because they highlight a turning point in market conditions. This strategy is appealing to many traders because it is not reliant upon the time-frame of the option, unlike methods which rely upon multiple time-frames. Furthermore, the strategy is appealing due to the fact that breakouts are easy to identify within price charts.
Overview of the Breakout
A breakout occurs when the price of an asset starts to break through either key support or resistances levels. Whenever the price of an underlying asset begins to fall below a level of support, a short expiry options can be purchased to cash in on the breakout. On the flip side, if the asset price goes past a level of resistance, a long expiry option can be entered into. As mentioned above, breakouts symbolize major shifts in price movements that are brought on by increased volatility within the marketplace.
Identifying Probable Breakout Points
Support and resistance levels will need to be used to identify areas of a possible breakout. This is because when asset prices hover around these levels more frequently, the levels become more and more important. The length of time the price is near one of these levels is quite important, as longer occurrences show higher odds of a breakout taking place. In addition to support and resistance levels, various chart patterns like Flags and Triangles can also be used to identify possible breakouts. You can test these strategies on a practice account at many if the different brokers.
In order to decide when to enter the market during a breakout, you’ll need to confirm that prices are closing either higher than the resistance level, or lower than the support level. If the closing price is close to the level of resistance, then assume the market is bullish. However, if the closing price is close to the level of support, then assume the market is bearish. Fakeouts are a possibility. These are times when a trader purchases a contract with a prediction of price movement in one direction, but the price actually moves in the opposite direction. To avoid this, reconfirm the entry signal by looking for higher trade volume and sustainable prices.
In order to decide when to exit the market, use historical price data to determine a reasonable exit point. For example, if prices had previously been trading within a range of approximately 10 points, that range could be used to set your target. As an alternative, you can utilize the average of price movements as the base-line level to set your target. To put it simply, you will need to determine a level within which you will stop trading on the breakout and move on to the next profit opportunity.
Lastly, should your trade not be going well, you can make use of the previous level of resistance. This could become the new level of support and vice versa. When prices are decreasing, this is the best method for establishing a cut-off point. What is most important when using this binary options strategy is that you do lock in profits and exit the market before sustaining much loss.