Breakout Strategy in Binary Options

Breakout Strategy in Binary Options

Submitted by adil on Fri, 02/28/2014 - 14:50

There is not a single type of strategy that yields the best results when it comes to trading financial instruments, but many. Across the board, whether one trades in stocks, regular derivatives or exotic derivatives, the trader needs to know about different kinds of strategies and apply those strategies according to given conditions. This makes one thing clear; a trader has to deploy different strategies for different market conditions.

Breakout trading is a strategy best suited for those binary options traders who have a higher threshold for taking risks and are able to act spontaneously. This strategy is usually applied on those types of assets which have consolidated themselves in certain range of price over period. In other words, the price fails to beat its support and resistance levels, and continues to move in between them. Therefore, the first thing a trader needs to do is perform an accurate analysis to select an asset and observe its trend situation. If the trend situation is relatively flat, the trader has the right candidate for a breakout trading.

Then the trader needs to keep an eye out for potential news that can have significant effect on the price and move it up or down. Alternatively, the trader can use price charts to look at the support and resistance level for the clues. If the support and resistance lines are converging and moving forward, expect a breakout soon. Moreover, the trader should plot pivot points on the price chart and observe the number of times the price hits the pivot points. If the price hits the pivot point repeatedly, then it is taken as a strong indicator that a breakout is about to occur.

The most intriguing challenge for any trader in a breakout situation is anticipating the direction of price and its momentum. When the breakout is to the up side the price breaks the resistance level and move above it, whereas when the breakout is to the down side the price breaks the support level and move below it. This situation can be easily handled in the binary options trading, and is quite difficult to manipulate in other instruments.

Where the trader is unsure about where the price breakout will occur, the trader should take position for both sides of the trade leg, that is, go long and short together, but taking care to remain equidistant from the current price. This leads to the situation where trader earns a net gain. The winning leg of the trade gives the trader a payout as agreed with the broker (60%/80%/etc), and the losing leg leaves the trader with loss of his initial investment only. The net effect remains a healthy gain.

A trader’s gain will be more if he can manage to correctly forecast the direction of price breakout. This will lead the trader to take a smaller investment in the alternative leg of the trade. However, doing this will increase the risk of the trader, and it will not be possible make any gains, only a certain amount of loss will be mitigated in case the price moves against the forecast.