Break Out Trading with Binary Options
There are many instances in the career of a binary options trader where it is difficult to develop a trading bias for a specific asset. Maybe there is no major news or economic data to help give traders a clear price direction. Does this mean that it is impossible to construct a trade idea for that asset? Not exactly.
When there is no clear fundamental data (such as a corporate earnings report or an macroeconomic data release), traders will often turn to chart analysis in order to get a direction of where prices will head next. One of the most common terms in this arena is the “Break Out” strategy, and here we will look at how some of these trading ideas are put to work.
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[bou_spoiler title=”Risk Warning”]Have in mind that investors can lose all their capital by trading binary options.[/bou_spoiler]
Understanding Support and Resistance
Put simply, a level of support is an area where prices have rallied in the past. This means that market demand is likely to increase if prices approach this region and further rallies are expected again in the future. Conversely, a level of resistance is an area where prices have declined in the past. This means that market supply is likely to increase if prices approach this region and further declines are expected again in the future. But what happens when these expectations do not play out according to plan? What would a break out of support or resistance indicate to binary options traders?
Break Outs as Evidence of Shifting Market Environment
One inevitable truth about the markets is that expectations for price will never hold up 100% of the time. Strong levels of support or resistance that defined a market previously can always change, and what these events tell us is that the market itself is now operating by new rules. Let’s take a look at what a price breakout would look like on a chart:
In this example, we can see that prices have broken to the upside by overcoming the previous resistance level. A break of resistance is a bullish event and the expectation is that prices will continue higher. A break of support to the downside would look similar (only reversed). A break of support is a bearish event and the expectation is that prices will continue lower. Upside breaks of resistance can be used as a basis for entering into CALL options, while downside breaks of support can be used when structuring PUT options.
Rationale Behind Breakout Strategies
At this stage you might be asking why breakout strategies are suitable for options trades. The answer to things comes from the fact that these price patterns are telling us that market dynamics are shifting. In addition to this, these breakouts tell us in which direction these shifts are heading. Since binary options allow of to benefit from simple directional forecasts, the information that is contained within breakout patterns can be highly valuable when constructing a trade idea.
In cases of resistance, there are large oppositional forces (bulls and bears) looking to gain market control at a critical historical price level. If the market is truly bearish, the sellers will win out. If the market is truly bullish, a breakout will occur and buyers will push through resistance. For technical traders, this is enough of a reason to take out a CALL option for a specific asset. Conversely, support levels contain the same type of information in terms of what it can tell us about the true nature of the market. Massive declines through support levels are typically used by technical traders as a reason to enter into PUT options.
Breakouts Give Clues for Traders
When there is little to be seen in the way of fundamental data or significant news events, structuring trading ideas can be difficult. Luckily, there are alternative strategies that can be implemented by traders that are finding themselves at a loss for new trade ideas. One of the most popularly used strategies looks at significant breakouts of support or resistance, and this can he an incredibly easy way of finding new times to enter into CALLS and PUTS. Identifying strong breakouts can take a bit of practice to master but once they are seen on a regular basis, these events become much easier to spot.