There are special market orders that professional traders can use in order to minimize the losses they incur. A stop loss order is an example of such an order. It is of particular interest to binary options traders.
Stop loss orders are triggered when the price of an asset reaches a certain level. This leads to a great increase in the supply of the asset in question. Usually many traders will have stop loss orders that are set to activate at the same price level. As a result, the upswing in supply can greatly affect the price.
This means that there is money to be made in binary options trading by identifying when a stop loss order is likely to come into play.
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First, let’s look at an example to help us illustrate exactly what a stop loss order is and how it works. An investor has bought an asset for a market price of $100. He did this, expecting the price to rise so he could sell it at a profit later. At the same time he is aware that the price could drop, and he could lose money. In order to protect himself, he wants to minimize his potential losses by making sure the asset is sold for at least $98. He can do this by activating a stop loss order that is set to spring into action once the price reaches $98.
This, in essence, is what a stop order is – an automatic market order that sells off assets once a certain market price has been reached.
In many cases, professional traders place stop loss orders at support levels. Should the support level be broken, it then becomes a resistance level. This changes things dramatically for investors who have bought the relevant asset. They will seek to offhand their long positions and replace them with short positions. This creates an upsurge in supply. You will see the same mechanisms at play with reversal patterns, trend lines and continuation patterns.
The increase in supply released by the stop loss orders is referred to as the breakout. There are several ways you as a binary options trader can make money on the breakout. Two of the most convenient ones are the following:
By keeping your eyes peeled for levels where stop loss orders are triggered, you can predict a reliable change in the market that you can make money on.