Trading Stops

Knowing where to find stop means knowing where to find money. Here is everything you need to know to trade stops successfully with binary options.

What are stops?

Regular traders either buy an asset or sell it short. Since their trades do not have a predefined expiration time as you can find it with binary options, the gains and losses of regular traders are determined by when they sell (long investments) or re-buy (short investments) the asset.

If a regular trader has invested in rising prices for an asset, for example, he has not yet made money when his asset starts rising. If the assets price turns around and starts to fall, he might end up with a losing trade. In a worst case scenario, his asset could fall from $100 to $1, which means he would lose 99 percent of his invested capital. Since many investors use leverage, their actual losses can be hundreds of times higher than the losses of the assets.

To prevent such a horror scenario from happening, regular traders use predefined stops. Stops are price levels, at which their positions will be terminated automatically. Long positions will be sold, and short positions will be bought.

If a regular trader buys an asset for $100, he could place a stop at $95, to ensure he does not lose more money than absolutely necessary if his prediction of rising prices was wrong. If his asset rises to $110, he could adjust his stop and put it closer to the current price to secure his earnings.

Stops are usually not placed randomly, but at strategically relevant price level in the market. Since many traders use stops and recognize the same strategically relevant price levels, stops accumulate at these price levels. Once the market reaches this price level, the huge number of triggered stops will create strong demand or supply and will lead to a strong, sudden price movement called the breakout. Identifying these prices can provide a binary options trader with many secure and profitable trading opportunities.

To understand where to expect stops, you have to understand the different types of stops. When you understand them, you will be easily able to identify where they will occur.

Types of stops

Most types of stops are variable. That means traders adjust them throughout their trade to secure their earnings.

Indicator based stops

Some traders place their stops based on the readings of an indicator. They can use any type of indicator. Most common are candlestick formations, the line of a moving average or trend lines; or volatility based indicators such as the average true range indicator or Bollinger Bands. As a binary options trader you should therefore expect to see a significant movement once the market breaks through any of these lines.

Trailing stops

There are two kinds of trailing stops:

a) Percentage stops

Some traders adjust their stop every time their asset has reached a new high (for long positions) or a new low (for short positions). A trader using a five percent trailing stop that has bought an asset for $100, for example, would place his initial stop at $95. As soon as the asset begins to rise, he would adjust his stop. When the price hits $105, his stop will be at $99.75. When the price hits $110, his stop will be at $104.5.

This kind of trailing stop is hard to predict and therefore hard to use for your trading.

b) High / Low stops

Some traders use the high / low of the last period as a stop. Every time a new bar is created, they adjust their stop to the previous bar’s high (long positions) or low (short positions). As a binary options trader you should therefore expect to see a smaller breakout once the market crosses the high / low of the previous day.

Time stops

Many traders are exclusively intraday traders, which means they will get rid of all open positions once they finished trading for this day, mostly shortly before the closing bell. This can distort the market, which is why some binary options traders avoid the last 30 minutes before the closing bell.

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