Trading Fakeouts with Binary Options
Hello traders, welcome to Binary Options Strategy and the 10th module Trading Binary Options Using Price Action. In this lesson, you are going to learn how to trade fake outs, and when talking about fake outs we are talking about false breakouts to the upside as at resistance and false breakouts to the downside as support but let’s start by defining what a fake out is.
Fake outs are a very interesting way of trading because the idea behind them is that we are going to take advantage of false breakouts. This means that we are going to be making money while the rest is getting squeezed out of their positions on a loss, and the reason the rest of traders are getting squeezed out of their positions on a loss is because they didn’t wait for the kim [SP] setup for them to try to trade the actual breakout. So, what they didn’t have is patience enough to wait for the actual setup for a continuation of the breakout.
Trading fake outs is not as easy as it sounds and we must follow very strict rules when it comes to trading them. For example, the rules for long entries at support are, prices testing at support area, price breaks with this area but immediately bounces back up and if you are using an RSI it must be at the oversold territory. Now, the rules for short entry at resistance are the same but on the other side on the market. Prices testing at resistance zone, price breaks with this area but immediately bounces back down, and the RSI is at overbought territory.
Now, let’s go through an example of what a fake out at support looks like. As you can see price is bouncing off this area of support and then reaches this area again before continuing to these highs right here. You can see that the move to the upside was a very slow move and then we have a sharp move to the downside. When this happens, you can anticipate a break out of this area of support because of the magnitude of the move to the downside vis-a-vis the move to the upside. Then you can see that we have a candle that breaks to the downside, and then we have two candles that immediately bounced price back up above the area of support. Now, this is what we call a fake out, and traders that traders that trade at the breakout of this candle are getting squeezed out their positions on a loss because they didn’t wait for the kim setup for them to trade the actual breakout.
Now, we are going to take advantage of these fake outs. So, what we are going to be looking at when we have an area of support that’s being tested is if we don’t have an actual breakout and if we have one candle that breaks above, or I’m sorry, that breaks below the area of support and then we have two candles that break above and close above the area of support we have a fake out and right here we have a signal to buy call options for a continuation to the upside. So, as you can see prices at the area they are faked out of the area of support but price continue to trade in a range, and the same thing goes when price is testing at area of resistance.
If we have a candle that breaks above the area of resistance and then we have price that sharply goes back below the area of resistance and closes below the area of resistance we have a signal to buy put options for a continuation of a range play. So, basically, this is what we are going to be doing, and of course if you are using an RSI, you have to look for an oversold reading when we have a fake out of support and an overbought reading when we have a fake out of resistance. You can see that the RSI is clearly telling us that price has gone down to levels that cannot be supported and needs to move back up. This is what this reading at the below 20 level gives us. So, this is, basically, how you are going to be trading fake outs and taking advantage of those breakouts that don’t follow through.