The late stage, low volume trading strategy has a complicated set up, but when it is used correctly, it will have a profound impact upon your binary options trading. Ideally, this is a strategy that should use put options only, but you may find variations of it on your own that call for other types of trades. Before you start using this, make sure you know how it works, how to correctly apply it, and the risk that comes along with it.
Application of the Late Stage
The late stage, low volume strategy applies mainly to stocks, and it involves the long term study of whichever asset it is that you will be trading. You should be looking for a stock that has seen significant growth which has been slowing down and even moving sideways in the more recent days leading up to your trade. Before you select the asset as a trade candidate, there should be a late stage breakout price increase. This means that there has been significant growth on the stock which has slowed down, only to once again start trading upward again. The catch is, this last jump upward in price should have been accomplished on an unusually low volume.
Volume is the measurement of the amount of shares traded per day of a stock. When volume is low, it implies that the stock was not as popular as it typically is. This means that the late stage breakout that you are seeing is not being accomplished with the same strength that previous gains have seen. In other words, it is not likely that the gains that are experienced in the late stage move will be held. Then, consider the fact that the prolonged sideways movement is a sign of trader and investor hesitation because there is a chance that a top has been reached. When these factors are combined, more likely than not, the price will begin to tumble.
This strategy necessitates the use of longer term put options. Drops are not always likely right away, and sometimes may take up to a week or more before they develop. When you spot this, it is recommended that you use other analysis methods to time your trades more precisely before you execute any of them. If you skip this final step, you will be correct more than 50% of the time if you stick with at least a weeklong expiry, but this strategy holds far more potential than a 51% correct trade rate. If your timing is more precise, you can expect to have much better profit numbers going for you.
Drawbacks to Low Volume
Binary options traders do not tend to think about volume much, so this is a concept that may be unfamiliar to many traders. As a result of this, it might not be something that many traders are comfortable enough gauging to properly implement the strategy into their daily routines. If you are going to use this, be sure that you know and thoroughly understand what volume is and how it impacts prices.
Also, this is a strategy that has been tried and tested with stocks, but it is not quite as reliable when it comes to other assets, especially those that cannot easily have their volume measured on a moment’s notice, such as what we see in currency pairs and the Forex market. Thanks to this, it is advised against using this strategy if you are trading currency pairs through your binary options broker. It can work, but there isn’t enough solid proof of volume here to offer you the confidence levels that you should be looking for when executing a trade.
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