A stop-loss order is a special form of market order used by professional traders to limit their losses or open new short orders. Stop-loss orders are especially interesting for binary options traders because they usually occur in bundles at strategic places, which effectively allows traders to find profitable trading opportunities.
In this article, we will take a closer look at stop-loss orders and how you can use them to make money with binary options. In detail, we will answer these questions:
- What is a stop-loss order?
- How can you use stop-loss orders to make money with binary options?
- How can you find stop-loss orders?
With the answers to these questions, you will be able to create a simple yet profitable strategy that can make you money with binary options.
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What is a stop-loss order?
A stop-loss order is a special form of an order with conventional assets. It is important to understand that stop-loss orders are orders made by traders of stocks and other conventional assets and that binary options traders do not place stop-loss orders themselves but can make a lot of money by understanding where stop-loss orders are placed and how they can profit from this knowledge.
Stop-loss orders serve a simple purpose: no trader can trade for 24 hours a day, 7 days a week. This simple limitation creates three problems:
- Often traders find a profitable opportunity that time has not yet come. By the time the trader gets around to trade again, the opportunity might have passed, and the trader would have missed out on a profitable trade. Traders need a way to take advantage of these opportunities without having to wait in front of their trading platform all day.
- When traders have bought a stock, they want to make sure that they can avoid large losses. Bad news about a company can make a stock drop double-digit percent, and there is no reason for conventional traders to lose that much money just because they were asleep while the news was released. They need a way to exit their position automatically when the market turns against them.
- Every trader can only monitor one asset at a time. To avoid missing trading opportunities or the right time to exit a position, traders need a way to handle the assets they are unable to focus on at the moment automatically.
Stop-loss orders solve all of these problems. Stop-loss orders allow traders to sell assets automatically when the market reaches a predefined strike price.
- When a trader has bought an asset, they can set a stop-loss order to exit the position once the market turns against them.
- When a trader has no position, they can use a stop-loss order to enter the market once prices start to fall.
To understand this system better, imagine that a trader has bought an asset at price of $100 because he predicted rising prices for the asset in the near future. He also knows that his prediction becomes invalid if the price of the asset should fall below $98. To make sure he does not lose more money than necessary if his prediction was wrong, the trader wants to make sure the asset is sold automatically when its price falls to $98.
That is what a stop-loss order is for. The trader places a stop-loss order at $98. When the market reaches that price, his asset is sold automatically.
Similarly, a trader could expect that an asset will continue to fall once it moves below $100. To make sure that they are invested in this movement if it happens, the trader would place a stop-loss order at $99. Once the market reaches this price level, it will trigger the order and sell the asset short automatically. The trader would now profit from falling prices.
With these two simply ways, stop-loss orders can solve many of the problems classical traders have. Consequently, stop-loss orders are a popular tool used by many traders.
How can you use stop-loss orders to make money with binary options?
The key to making money by trading stop-loss orders is understanding that traders of classical assets place stop-loss orders strategically at specific price levels. When the market reaches the price level of these orders, they get triggered automatically. Many orders are executed at the same time, leading to a strong incline in supply and a rapid decline in prices.
By learning to identify the spots stop-loss order usually occur in, a trader can establish a secure way to finding good investment opportunities.
By anticipating where traders have placed many stop-loss orders, binary options traders can identify price levels that, when triggered, are sure to lead to strong downwards movements. When traded with a low option or, for traders with a higher risk tolerance with a one touch option or a ladder option, price levels that hold many stop-loss orders can provide high-quality trading opportunities that allow you to win a high percentage of your trades and get a high payout.
Of course, you are unable to predict every single stop-loss order in the market. Some traders might have placed their orders randomly or without giving their decisions much thought. Some traders might use a system nobody else uses. There is, however, one tool that allows you to predict where many stop-loss orders appear in bulk. This tool is technical analysis.
Technical analysis is the form of market analysis that traders use to predict market movements on short time frames. When traders have to predict whether an asset will rise or fall over the next few hours, analyzing fundamental factors is of little help. To solve this problem, technical analysis defines price patterns that often lead to a specific outcome. Technical analysts use these price patterns to arrive at predictions about what will happen next.
Often, the market has to reach a specific price level to complete a significant event for technical analysts. At this price level, technical analysts place stop-loss orders. When you understand the price formations that these analysts will use to place orders, you can anticipate the strong movements they will create.
For example, stop loss orders are usually placed at support levels. Support levels are price levels at which the market has turned around repeatedly. For example, if an asset is trading at around $100 and has dipped to $99 twice only to turn around again, $99 is considered a support level. Apparently, many traders are willing to buy the asset for $99, but few are willing to sell for this low price, which is why technical analysts would expect the market to turn around again when it approaches $99 the next time.
When this expectation fails, the support level at $99 is broken. Now, traders would expect the market to keep falling until it reaches the next support level. Traders that had invested in rising prices will get out of their positions, some traders will invest in falling prices, and some traders will do both. To perform these actions automatically, many traders will place stop-loss orders below $99, probably at around $98.80.
When the market breaks through the support level, it turns into a resistance, which creates an entirely different environment for most investors. They will, therefore, liquidate their long positions and open new short positions, which creates a lot of supply. Consequently, the market is likely to fall strongly.
Similar patterns form when the market breaks through trend lines completes a continuation pattern or a reversal pattern.
The strong price movement created by stop loss orders is called the breakout. As a binary options trader, you can profit from the breakout in a number of ways:
You can invest in High / Low option in the direction of the breakout. Make sure to choose an appropriate expiration time.
If you can predict the distance of the movement, you can invest in a Boundary option or a Touch option.
How can you find stop-loss orders?
To find stop-loss orders in the market, you have to learn technical analysis yourself. While this can seem like a tall order, there are several shortcuts you can take. You do not have to understand every little aspect of technical analysis; you only have to know a few aspects and trade them well. So what are the easiest formations of technical analysis to learn?
Let’s take a look the easiest formations:
Trends are the easiest formation of technical analysis because they relate to the way we intuitively think about the market. We are continually looking for assets that will rise or fall, and trends are the price movements that take assets to new highs and lows.
Trends are zig-zag movements. When the market rises or falls, it never moves in a straight line. It takes two steps forward and one step back, moving in its main direction until it runs out of momentum, has to go through a consolidation period and can resume its main direction again.
A trend is intact as long as every new extreme is further in the direction of the trend than the previous extreme.
- An uptrend is intact as long as each new high is higher than the previous high and each new low is higher than the previous low.
- A downtrend is intact as long as each new low is lower than the previous low and each new high is lower than the previous high.
No trend lasts forever. An ending trend is a significant event for technical analysts because those traders who had invested in the trend have to close their positions and are likely to invest in positions in the opposite direction.
- An uptrend ends when it creates a new low before it creates a new high.
- A downtrend ends when it creates a new high before it creates a new low.
These events are sure to generate strong movements. Depending on your risk tolerance, you can trade them with a low option, a 60 seconds option, a one touch option, or a ladder option.
2. Simple candlestick formations
Candlesticks are a special way of displaying market movements. Instead of using a simple line, as many conventional price charts do, candlestick display market movements in many small symbols that look like candles.
Candlesticks are the favored way of displaying price movements for serious traders because they display more information than simple line charts.
Line charts only use price for each period and connect them to a line. In an hourly chart, for example, a line chart would only use the last price of each hour and connect them to a line. Every other price is ignored. This is a problem. A period where prices moved far from the opening price and returned is displayed in the same way as a period where prices remain flat.
Line charts deprive you of significant information. Candlestick formations solve this problem by displaying the opening and closing prices of each period with its thick body and the high and the low of each period with its thinner wicks to each end.
With this system, you know every price of a period without having to zoom in. Consequently, a single candlestick can provide significant information about what is happening in the market. Technical analysts have defined many formations that allow for simple predictions that you can learn quickly. You do not have to understand all of the formations, but even if you understand just one or two, you can find plenty of trading opportunities.
One significant candlestick formation is the inverted hammer. When the market started to move upwards, far away from the opening price, in a period but turned around to move close to opening price or the low of the period, the market has ended the period in a downtrend. Most traders are reluctant to invest in this signal alone, instead of waiting for the market to confirm the inverted hammer by breaking through the hammer’s low.
When the low of the inverted hammer is at $99 but the end price at $99.50, traders will wait for the market to reach a price of $99 again before they invest in falling prices or exit their positions that predict rising prices. Consequently, they will place stop-loss orders at $99.
You can anticipate these orders and the strong movement they will create. When the market reaches the low of the preceding inverted hammer, invest in a low option, a 60 seconds option, a one touch option, or a ladder option.
You can follow a similar strategy when a downtrend creates a new low. Whenever a trend breaks through the price level of the latest low after it has created a new high, the trend proves that it is still intact. Those traders that had invested in a turnaround will close their positions, and many traders will invest in falling prices. The result will be a strong movement that you can take advantage of.
Of course, there are many more candlestick formations that allow for similarly simple predictions. By learning to recognize a handful of candlesticks and the predictions they allow, you can create a versatile and effective strategy that utilizes the power of stop-loss orders to make you money.
3. Moving averages
Moving averages are technical indicators that calculate the average market price over the last periods and draw the result into a price diagram. The result is a line that displays the average price of the preceding periods for each respective period.
Some significant moving averages are used by many traders use. When the market crosses these moving averages from the upper side to the lower side, it is a significant event for technical analysts that is sure to trigger many stop-loss orders.
Moving averages are so significant because they allow traders to easily evaluate whether an asset is currently moving up or down. Think of this example: When you use a moving average that calculates the average price of the last 20 hours, there are two possibilities:
- The current market price could be higher than the moving average: In this case, the market is apparently rising.
- The current market could be lower than the moving average: In this case, the market is apparently falling.
When the market crosses the moving average from the upper side to the lower side, the market environment has changed. What was a bullish market environment where many traders invested in rising prices turned into a bearish market environment where traders invest in falling prices. Because this change happens at a specific price, it is radical and sure to trigger many stop-loss orders.
As a binary options trader, you can profit from the strong market movement these orders will create by investing in a low-option, 60 second option, one touch option, or ladder option.
Stop loss orders are a convenient way for traders of conventional assets to open short positions or close long positions automatically. When many low options are triggered at once, the resulting surplus of supply will push the market lower in a strong movement. Binary options allow you to anticipate this movement and profit from it. The three easiest movements to find are trends, simple candlestick formations and moving averages.