Trading the breakout is one of the most essential forms of finding an entry point to invest in a binary option.
Every investor should know how to trade a breakout, as it is a profitable and secure way to enter the market that can be combined with many binary options trading strategies.
What does trading the breakout mean?
With binary options, correctly predicting the future direction of the market is not guaranteed to win you your investment. Since binary options are very short term investments, if you enter the market at wrong time, a short term price fluctuation in the opposite direction can make you lose your option even though you predicted the main direction of the market correctly.
To avoid such a problem, you have to pick the right time to invest. One great way of finding the right entry point is trading the breakout.
Most regular short term traders also use technical analysis to predict the future direction of the market. Whenever an asset forms a significant pattern for technical analysts, many regular traders will recognize this pattern, too. This means they will adjust their trading accordingly.
Let us imagine a support level, for example. Technical analysts know that once a support level is broken, it becomes a resistance level. Once prices break through a support level, they will therefore invest in continually falling prices. Those traders invested in long positions will close them automatically using a stop loss order. Many traders will also open new short positions.
This surge in supply will lead to a sudden, strong price movement once the support level is broken. This movement is called the breakout. Breakouts occur at every significant event in technical analysis: The breaking of a trend line, the completion of a continuation / reversal pattern, or the market moving past the previous point 2 in a trend, for example.
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Trading the breakout with binary options
As a binary options trader you can use the breakout to invest in a binary option successfully. If you expect a bearish breakout, you can invest in a Low option right before the breakout is about to happen. Keep your expiration time short in relation to the time frame of your price chart. Vice versa, if you are expecting a bullish breakout, you can invest in a High option right before the breakout is about to happen.
If you are expecting a strong breakout and your binary options broker offers a Touch option with a reasonable target price, you can even invest in a Touch option. Touch options offer a high payout. If you are able to win a reasonable amount of your trades with a strategy such as this, you can make big profits in a short time. A similar approach would be possible with Boundary option, if you prefer that option type.
It does not even matter whether the initial prediction that caused the strong movement of the breakout is right or wrong. By the time this will be decided, your binary option will be long expired and you will have won the investment. The simple fact that you realized when many traders made the same prediction at the same time is enough for you to win the option.
Futher reading: False Breakouts