Trading the Breakout

trading the breakoutA great way to time an investment in binary options is trading the breakout.

All traders ought to know how to do this. Trading the breakout is not only a safe approach; it also has the potential to be highly profitable. A lot of strategies for binary options work very well in combination with breakout trading.

Defining what a breakout is

Alas, it is not enough to make a correct prediction regarding future market movements in order to win a binary options trade. Due do the extremely short term nature of binary options, even a very short-lived price fluctuation in the wrong direction can cost you your winning trade, even if your prediction matches the overall direction the market is moving in. Avoiding such mishaps is all about timing.

It is of fundamental importance to enter the market at just the right moment. A method of doing this, which has proven highly successful, is trading the breakout.

The majority of short-term traders will rely on technical analysis to help make predictions about future market movements. Such traders are on the lookout for significant patterns in the way the price of an asset moves. Technical analysis will flag them as relevant, and the traders will respond accordingly.

In the case of a support level, for instance, technical analysts are aware that when a support level is broken it then turns into a resistance level. Traders who rely on technical analysis will respond to prices smashing through a support level by investing in falling prices. In such an event traders who had invested in long options will have them automatically stopped through a stop loss order. A number of traders will in addition choose this moment to invest in short options.

The resulting increase in supply will cause a significant movement in the price as soon as the support level is broken. It is this movement that is the breakout. In technical analysis a breakout happens during several important events, for example when a trend is broken, or a continuation / reversal pattern is completed.

Try trading now or continue reading the article, Trading the Breakout, below the table…

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Using binary options in trading the breakout

There are ways you, as a binary options trader, can use the breakout to complete successful investments. For example, if you think a bearish breakout is imminent, this is your chance to invest in a low option just before the breakout actually occurs. Make sure to choose an expiration time for the option that is short compared to the timeframe you use for your price chart. If you expect a bullish breakout, the same applies in reverse.

You can also trade the breakout with touch options. In cases where you expect a particularly strong movement, this can be a great way to earn a greater profit. Touch options offer far higher returns than a simple high/low option, so if you do this successfully, you can really make a lot of money this way. You can also invest in boundary options when you expect a strong breakout. Also boundary options offer big returns.

The beauty of following this strategy is that a boundary option has such a short expiry time that it is irrelevant whether the prediction that resulted in the strong movement proves to be correct or not. You are only concerned with what happens within the time frame of your binary option. What the consequences are for future price movements do not matter. In this instance you simply realized that a lot of traders would reach the same conclusion, and act accordingly. This is what you invested in – not the direction of the asset’s price.

 

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