Breakout trading strategy – Trade with moving averages
To make the most of binary options trading there are several time tested strategies that can be implemented depending on the type of underlying asset you with to trade in. One of the spread betting techniques used by active traders is the breakout trading strategy. This involves identifying trend waves in their initial phases. With the right money management techniques you can limit any risks and take advantage of price moves before the market is aware of any developing trends. An increase in prices above or below their historical ranges gives rise to signals for breakout trades. The strategy involves using breakout signals to set trade entries, stop loss levels and profit targets to create favorable trades.
Buy high and sell low
The basic theory is to keep a watch for assets that move up or down beyond previous fluctuations. The asset should have exceeded its previous maximum price for at least two days in order to implement a favorable breakout trading strategy. This is usually an indication that the asset will rise to its true price after the market correction. Breakouts occur when the price of any underlying asset exceeds any predetermined support and resistant levels. When prices tend to move above the resistance level it triggers long positions. One the other hand, when the price of the asset drops below a defined level of support it triggers short position. For the most part, the spread betting market is usually caught by surprise since breakout trades are not common. In addition, traders that implement range trading strategies usually have stop losses beyond the defined range. When stop losses are triggered by a breakout, the price usually gains favorable momentum in the direction of the break along with an increase in volatility.
How breakout strategies work
There is usually no set pattern for a breakout although long term charts create much more significant changes in volatility and momentum which makes it easier to forecast and pitch a successful trade. Daily and monthly breakouts typically indicate clearer changes in underlying trends in the price movement. For most traders, a good trading opportunity is often easy to spot. You sell when the market moves up and buy when it heads the other direction. While this is a typical situation it is much more difficult when assets break out of the trading range. The pressure begins to build when an asset trades within a range for a while due to an increase in trading positions put on. When a breakout is in the upward direction, traders tend to buy back their positions to limit losses since the shorts are hurt. On the other hand, traders sell out when the breakout is downwards since their long positions are affected. The general rule is that breakouts are stronger when the market stays within a range bounded by a high and a low. This is normally the right time for a stop-entry order.
Use the strategy wisely
One of the major reasons why many traders prefer breakout spread betting is because allows for clear entry levels that lead to greater profits due to higher volatility. When the price rises above a defined resistance level it is usually the right time to place and open ‘buy’ positions since the price is assumed to continue in an upward direction and open ‘sell’ positions in a reverse trend where prices fall below a support level. To implement a successful breakout trading strategy it is important to determine the best resistance and support levels which is usually the number of times the levels have been tested in the past. Many traders have developed confidence in using breakouts for spread betting where there are likely to be many long positions just below the lows in the trading range.