One thing that matters the most in binary options trading is prediction. That’s because without accurately speculating the price of an asset, you cannot make a winning trade.
But speculating the price is not easy, especially for small binary tradings. Small trade requires you to make a quick decision to exit the market in no time.
You can become a good trader by using an excellent trading strategy like a breakout. It is one of the few trading strategies that can help you make an excellent profit with limited risk.
If you want to trade binary options using breakout strategy, you need to understand what breakout strategy is, how to use it, and its underlying theory.
Good to know:
- The breakout strategy in binary options involves trading when the price of an asset breaks through established support or resistance levels, indicating a strong move.
- Accurate identification of breakouts, including distinguishing them from false breakouts, is crucial for this strategy to be effective.
- Breakout patterns can be recognised by various chart formations such as triangles, flags and wedges.
- The strategy has advantages such as limited risk and high profit potential. However, it also carries risks such as false breakouts and slippage.
What you will read in this Post
What is breakout strategy for Binary Options?
The breakout strategy is a concept when the price of assets begins to consolidate on certain positions. These position in the trading chart later forms support and resistance.
You can easily spot support and resistance level in the chart.
If the price of a commodity goes above a certain level, it’s called resistance. Similarly, if the price falls below, the level is known as support.
Now, if the price of an asset does not break the level of support and resistance, you can conclude that the price is testing the level. However, if the price manages to break the level, this indicates a breakout in the trading market.
When you notice a breakout in the market, you must confirm it, as sometimes there are fake breakouts. And if you exit the market during a fake-out session, you might lose all the trading amount.
Traders who want to benefit from breakout strategy wait for a breakout and then enter a position in the trend. At this point, the level of support and resistance gets reversed.
As a trader, if you want to use this strategy, you must carefully analyze the chart and consider the price fluctuation. Moreover, when support and resistance are broken, you can enter a position.
What is the underlying theory of a breakout strategy?
You should enter the trade when there is a breakout in the market. This strategy depends on two things.
Firstly, you must identify a breakout level in a market. Secondly, you should check the momentum. If there is enough momentum for the break, your trade will be successful.
Along with a strong breakout level, you need strong market volume to make a successful trade. Additionally, you should be quick and must trade in high volume to make this strategy work.
You are required to identify levels of entry to execute binary options breakout trading. For identifying the entry-level, you need to look for break levels. The break level is the point where the price of an asset goes beyond the identified level.
Trading binary options at the right time are crucial because you can lose a well-planned trade if you fail to pick the right time.
Elements of a breakout
Breakout is a sudden directional move of price, and it comes in different varieties. Here are a few common breakout elements.
When there is heavy buying and selling in the market, it results in unstable market conditions and increases market volatility. When volatility in the market increases, the possibility of a trend forming in the market rises.
If there is an increase in the volume of assets, it affects breakout. When this happens, the market participants hope to open long and short-term positions to make more profit.
Directional move-in price
Directional move in price is the product of heightened volatility and increased market participation. If there is no directional move in the price, the market breakout will not take place.
Each of these market elements is important, and they affect each other. That’s because an increase in market participation leads to more volatility. And this further creates a new trend in the market.
A breakout trading can occur in any market condition. If you want to gain profitability from this strategy, you can use it in the equities, forex, and futures markets.
Identifying a breakout
It’s essential to identify breakout to trade binary options successfully. You can find breakout by using one of the four ways.
Support and resistance
The first way you can identify breakout in the market is by looking for support and resistance. It is a way of doing technical analysis.
Some common examples of technically derived support and resistance are pivot points, Bollinger Bands, moving averages, and Fibonacci retracements.
One of the popular ways of identifying a breakout in trading is by using chart patterns. Candlesticks, flags, and pennants are some of the common chart patterns.
Sometimes, when the market is consolidating, it indicates a period of indecision in the market. In this case, the market participants enter the trade and take the price either up or down.
Periodic news release
Another way of identifying a breakout in the market is by looking for periodic news releases. A major financial news act as a catalyst in moving the price.
The price of an asset breaks the level of support and resistance in different patterns. Here are a few of them.
The symmetrical triangle in the trading chart shows that the market is in indecision mode. You can spot a symmetrical triangle when the price is alternate lower highs and higher lows in upside and down slopes.
You can spot an ascending triangle when the market price is making higher highs and higher lows. It usually indicates bullish price action.
Here, the ascending triangle is bound by two trend lines. The line connects an upward slope and a horizontal line at the top.
Also, the triangle price must intersect the trend line twice before completing the pattern to make a successful ascending triangle.
This breakout pattern is the completely opposite of descending triangle. In this case, two trend lines bound the triangle. However, these lines connect horizontal trend lines at the bottom and downward slope.
The price must intersect trend lines twice to form a strong descending triangle.
The bull flag in the breakout trading strategy indicates a temporary pause in the trend. You can spot this pattern when the market breaks out by the tight formation of lower highs and lower lows.
The bear flag is the opposite of the bull flag. This pattern occurs when the market consolidates during a downward trend. Bear flag forms higher highs and higher lows.
In a rising wedge, there are higher highs and higher lows, which converge at the top. A rising wedge is a bearish pattern, and it occurs in downtrend and uptrend markets.
Additionally, this breakout pattern has a high failure rate as compared to other trading patterns. Also, this pattern makes trading in breakout difficult.
A falling wedge indicates lower highs and lower lows in the market. Here, the trend line diverges at the bottom.
Just like a rising wedge, this pattern also has a high chance of failure. But that’s because falling wedge offers several false signals.
How to use the breakout strategy in trading?
You can use breakout strategy in binary options trading in two ways, i.e., short duration options and long duration options.
Short duration options
Short duration options trading means you can exit the market in between 5 to 30 minutes. For short-term trading, you can use the indicators that are generally used for 60 seconds trading.
Also, the market should be in a neutral trend for successful short-term trading.
Long duration options
If you want to trade long-duration options, you can exit the market anytime between 4 hours to 1 day. For long-term trading, you don’t need to wait for the market to have any defined trend.
Advantages and disadvantages of breakout trading
Just like any other trading strategy, a breakout strategy also has certain advantages and limitations.
Here are a few benefits of using a breakout trading strategy.
By using a breakout strategy for binary options trading, you can limit the risk. That’s because breakout trade is present at consolidating market phases. This trading strategy also offers an excellent opportunity for a quick exit.
In breakout trade, the market entry and exit are predefined. That means subjective error regarding trade management is limited.
If you have correctly analyzed the market while using a breakout trading strategy, you can win a huge profit. Also, if the market reverse or the trend fizzles, the stop loss is hit.
Here are a few limitations of breakout trading strategy.
When using a breakout trading strategy, you just check the data twice because false breakout is a common possibility. And if you exit the market based on a false breakout, you might end up losing a huge amount of money.
It’s essential to enter the market with precision to trade binary options via breakout strategy successfully. However, the price of assets keeps changing because of increased market participation. So, it can be a little challenging to enter the market with accuracy.
(Risk warning: Your capital can be at risk)
Conclusion: stick to a proven strategy and make winning trade
There are several benefits and limitations of using the breakout strategy for binary options trading. But if you know how to identify breakout and use this strategy, you can increase your trading profitability.
Also, you should stay alert while using this strategy as false breakouts might make you lose all your investment. So, stick to a proven strategy and trade accurately to make winning trade.
Frequently asked questions about Breakout Strategy :
What is the Breakout Strategy in Binary Options Trading?
The breakout strategy involves trading binary options when the price of an asset breaks through established support or resistance levels. This indicates a strong move in the market, either upwards or downwards.
How Do You Identify a Breakout in Binary Options Trading?
Breakouts can be identified by looking for support and resistance levels, chart patterns (like triangles, flags, and wedges), market consolidation, and reactions to periodic news releases. Key patterns include symmetrical, ascending, and descending triangles, bull and bear flags, and rising and falling wedges. It’s important to distinguish true breakouts from false ones to avoid premature market exits.
What Are the Advantages and Disadvantages of Using the Breakout Strategy?
Advantages include limited risk, as the strategy often occurs in consolidating market phases, clear trade management with predefined entry and exit points, and high profit potential if the market moves favorably. Disadvantages include the risk of false breakouts, which can lead to losses, and slippage due to rapid price changes, making precise market entry challenging.
Can the Breakout Strategy be Used for Both Short and Long Duration Options?
Yes, the breakout strategy can be adapted for both short and long duration options. Short duration options (5 to 30 minutes) often use indicators suited for quick trades and require a neutral market trend. Long duration options (4 hours to 1 day) don’t require a defined market trend and allow for more extended market engagement.