There are periods in the market where volatility is low volatility, trading volume is thin and prices are in consolidation. During these times, prices usually occupy a narrow band with a clearly defined region where price cannot go above (resistance) and where price cannot go below (support).
After this period where there is a lull in price activity in the financial markets, the players in the markets will readjust their trade positions to reflect the results of the high-impact news releases. This causes a sharp movement of price in a particular direction, and if the impact is heavy enough, the price of the asset will break out of its range of limitation. This is the breakout, and is the basis of this binary options strategy.
To trade the binary options breakout strategy, you need to know the following:
- What binary option to trade
- The rules for the strategy
- Trade setup
- How to set a proper expiration time
- Risk management techniques for the trade.
There are two trade contracts that can be traded with this strategy. These are:
- Touch/No Touch
We will take the two examples one after the other.
CALL/PUT: Strategy Rules
The strategy depends on identifying range in which the price action will likely be found, followed by a break of price action out of this range. The price range is determined by:
- Defining recent highs and lows of price action, with trend lines drawn across these areas to form defined resistance and support areas respectively.
- Using the channel tool for situations where the price of the asset is not moving in a sideways direction, but is trending upwards or downwards.
The trade setup will involve:
- Identifying the price boundaries.
- Identifying the breakout.
- Using the breakout to trade a Call or Put option.
It is important to note that a break of support turns that area to a resistance. Likewise, a break of a resistance line turns it into a support. This role reversal becomes pertinent when trading the breakout.
Allow the asset to break through the trend line. A trend line break occurs when the price has moved above a resistance line and closed above it, or moved below support and closed below it. Merely moving beyond a support or resistance while the candle in view is still open is not considered a breakout until the price has closed beyond that area.
Usually, the price will try to return to where it came from, but this will be rejected at the broken trend lines because of the role reversal described above. Wait for the price to be rejected at the appropriate trend line, and then trade along the direction of the breakout. This is demonstrated as follows:
From the point of rejection after the breakout, enter a Call option. This is shown below:
The setup above is what is commonly seen in a bullish trend line breakout situation. Again, the candle broke through the resistance and the next candle attempted to return to where the asset was coming from but was resisted. The next candle formed a hammer which was a bullish reversal candlestick that supported the upside move as shown on the chart.
The ascending channel can also be used to trade this scenario, since the bias for this channel type is for price to keep moving upwards.
At the point where price breaks the trend line, tries to move back up and is rejected, enter a Put trade at the point of price rejection at the support now turned resistance. This is shown below:
It should also be said that where price is in a horizontal range (i.e. a sideways market) and there is a market influence that pushes prices lower to break support, then the same principles can be used to trade that setup as well.
Expiry Time: Allow at least 3 candles to elapse and use this as the expiry time. So if you use the hourly chart, expiry must be set to at least 3 hours. This gives the trade enough time to move well into the desired direction and put the trade in the money.
In the Touch/No Touch trade, a single strike price is given. The trader must then decide if the price action will touch this target (TOUCH) or fail to touch it (NO TOUCH) within the allocated expiry time.
The broker will usually provide the strike price for the trade. The trader must then decide if the strike price is in the direction of the breakout. This is how to trade the situation.
- Touch: If the strike price is located in the line of the breakout and is located within 20 pips above the resistance or below the support line, then select the TOUCH option.
- If the strike price is located below the resistance and above the support AFTER the breakout has occurred (i.e. after the candle in view has closed above the resistance or below the support), then select the NO TOUCH.
For this trade, the direction of the breakout is downwards. The trade is taken AFTER the breakout has occurred. If the strike price is located below the support line as shown (blue line), then the trade to be taken is the TOUCH trade. If the strike price is located above the support line, then the trade to be taken is the NO TOUCH, because the support line starts to function as a resistance after the breakout has occurred.
RISK MANAGEMENT TECHNIQUES
No more than 3% of the account size should be exposed to the market at any given time. So if your broker’s minimum trade amount is $25, then you should have at least $1000 in your account. What the risk management technique does is that it allows the account to have a good deal of room to survive a losing trade. Traders may not always get the implementation of this strategy right, and therefore it is essential to fund the account so it has enough liquidity to withstand negative influences.
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