The railroad tracks strategy is a bearish strategy, and it is an easy to use technical method of identifying resistance in an asset. When used with binary options, you should be looking at medium length timeframes, giving the markets enough time to respond to the pattern, but not enough that other factors can influence the price of the asset. Let’s take a look at what the railroad tracks strategy looks like, and how to best use it.
You Have to Apply the Strategy
The railroad tracks strategy is all about pattern recognition. It always occurs at the top of a chart, and it always should be used as an indicator that a price drop is about to occur. The ideal timeframe for this trade is from 5 to 15 minutes, and put options should be your only choice. This strategy is called “railroad tracks” because the pattern that you should be looking for looks precisely like its namesake. There should be two bars that are completely even with each other, with price lines that are lined up. This means that the closing price of one session should line up with the opening price of the next session. If there are more than two lines that are lining up as tracks like this, the signal becomes much stronger.
Once you notice this pattern, then your next step is to take out a put option. This strategy works because your lines should already be up at the top of your chart, indicating that a level of resistance has already been hit. Now, we are looking at traders keeping that asset’s price up near the top of the price channel for a prolonged period of time. This is what the railroad track is indicative of, after all. You should be looking for an expiry that meshes up well with the price chart that you are looking at. If your bars are representative of 2 to 5 minutes, then you should look for expiries of 5 to 15 minutes. If they are longer, your expiry should be longer. Remember, you don’t want to go out too far in time as this opens up the door for other factors, such as those that would be picked up by fundamental trend traders, to step in and ruin your trade. If you can find fundamentally flawed assets to use this strategy on, your certainty factor will go up in a big way.
Do note that this relies on bar charts, and not candlestick charts. If you use candlestick charts, the railroad pattern will not be as visible because of their “wicks” instead of protruding lines for open and closing prices.
The railroad tracks strategy is typically effective, but it does have a major flaw within it. It is a visual indicator, which implies that it does not take into account the fundamental strength or weakness of an asset. It also does not take into account technical data that may or may not negate its appearance. These things boil down to the end result that while it does display a resistance point, the railroad tracks strategy of looking for put options does not necessarily take into account what’s actually happening with it. This adds to its incorrect rate, but thanks to the fact that this data is often the source of its visual representation, it is correct more often than not.
It is also possible for fundamental factors to influence the trade, even if you keep the expiry as short as possible. News events can also pop up at any time, ruining what might have seemed like a perfect trade. Unfortunately, there’s no way to avoid these things other than accounting for them in your risk management strategy.
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