Trading breakouts is not as straightforward as the name implies. Unlike trend following where the only direction that traders need to concentrate on is where the trend is going, breakouts can be traded in both directions.
When markets break out of a trading range it means that the market is transitioning from a state of a relative equilibrium into a state where one side starts dominating the other. Sounds simple and elegant enough. This however is only part of the real picture, because these breakouts can be "breaking" anything from trend lines to previous candles. The term breakout simply means that the market is moving above or below a certain high or low.
Trading binary options when the market is breaking out is not as straightforward as it may seem though. Rarely do we see breakout candles close exactly on the breaking out price, and since the best signals are those after the candles close, trading breakouts can be a bit tricky.
Price breaks the support line but stays above it for nearly an hour.
The markets like to keep their inertia. This means that the same force that makes the trend just keep on going, will keep the range from breaking out. In fact, trading breakouts in the direction of the breakout can often be a losing strategy. Looking at an example of a 15 minute EUR/USD chart shows how trading the breakout before the candle closes and in the direction of the breakout is a losing bet. Timing is of great importance when trading, especially in binary options.
Example of price breaking out and reversing.
Actually, when the market is trading in a range and it is nearing its bottom, it is often better to trade in the opposite direction. Keeping in mind of course we wait for the candles to close so that we can determine how strong the breakout is or how weak and likely to fail it is.
If we look at breakouts that happen in different circumstances, for example in a bull or upward trend, then buying a call option, which is a trade with the upward trend, is a strong position to take.
Trading breakouts in the direction of a strong trend and with strong candles
Generally speaking however, the term “breakout” is misleading because most of the breakouts fail to really break and the market remains in the range it was supposed to get out of. So in fact, buying puts or calls depends on the type of breakout, the direction of the trend, whether it's in a range and also on the signal that is telling you to act.
Breakouts are just one part in the spectrum of trading, but they are crucial at the same time since they represent the beginning of trends, and this is the only way that traders actually make a profit, since it is the difference between prices that makes them profitable or not.
