Trading Wedges and Breakouts with Binary Options
Hello, traders! Welcome to Binary Options Strategy an intense module training Binary Options using price action. Today we are talking about wedges and breakouts and the first thing you need to know is that when we are going to trade wedges we are also going to be trading reversals in the market.
Now let’s start by defining what a wedge is. The wedge pattern is seen as a reversal of the trend that is currently formed within the wedge itself. So this is very important. We are going to be trading the reversal of the trend or of the move within the wedge. Not the overall move of the market. Now, this is something that you need to understand. Wedges can be found at the end of moves or in the middle of the moves. But we are always going to trade the reversal of the move within the wedge. Price contraction within the wedge makes for a very strong breakout which will push price rapidly in one direction. And here is where we are going to be profiting from normal. There are two kind of wedges, a rising wedge, which is a bearish pattern at the end of the move, and a falling wedge which is a bullish pattern at the end of a downward.
Remember when we are talking about an up move, we are talking about the up move within the rising wedge and the down move within the falling wedge. When trading wedges, we are always going to wait for the breakout to buy our options. And remember these are always reversal trades of the move within the wedge. But this doesn’t mean that wedges can’t be found in the middle of trends for trends continuation trends. So what I’m trying to say is that sometimes you are going to find these wedges at the end of moves and sometimes you’re going to find them in the middle of trends as corrective moves. In any case you need to pay attention at the formation itself and if it’s a rising wedge you are going to be bearish and try to buy bull options and if it’s a falling wedge, you’re going to be bullish and try to buy call options.
Sometimes these wedges will be corrective moves within the trends. In any case, if the wedge is rising, you will be looking for a breakout to buy puts and if it’s falling, you will wait for the breakout and buy call options. Now we’re going to go through both examples and I’m going to show you exactly what I mean when I say that you can find a rising wedge in the middle of a move as a corrective move and a falling wedge in the middle of a move as a corrective move too. And I’m going to show you the exact moment where you are going to buy your options and I’m going to tell you why you have to wait for that moment to happen.
Let’s start by going through a rising wedge. As you can see we have price action trading in what seems to be an immediate up move. You can see that we were in a down move, we were making lower lows and lower highs and then we started correcting to the upside, inside of a wedge. Now, this is very important. The direction of the market is down, but the wedge is a rising wedge. So we are going to trade the reversal of the move within the wedge which means we are going to trade the downside of the market for a continuation of the overall trend.
Now some traders out there wait for the breakout of the wedges support in order to buy put options. But what you need to understand, is that you need to wait for the break of the previous low too. And the reason you are going to wait for the break of the previous low is because sometimes price can come and test the previous low and just continue up its up move. We need to break with this up or this immediate up structure. And by breaking this wedge support, this up structure is not broken yet. We need to break with the previous low in order to break it completely. So at this place right here, we have confirmation of the breakout of the wedge, so here we are going to buy our put options. And as we can see, these put options expire in the month.
Now, it’s very simple, every time you see a rising wedge forming, you are going to wait for the breakout, then you are going to draw a horizontal line from the previous low and when the previous low breaks, you are going to buy put options. And remember if you are analysing price action in the five minute chart, you are usually going to be trading the thirty minute expiration option. At least give your options 4-5 candles for the trade to develop your way. Now let’s have a look at a fallen wedge. Now you can see the price is moving in a up move or we are in an overall uptrend. We are making higher lows and higher highs, and then price starts correcting inside of a wedge.
Now again, you need to wait for the breakout of the wedge to the upside. Even though we are in an up move, the immediate move inside the wedge is a down move. So we are going to trade the reversal of the trade within the wedge. Or the trend within the wedge. This is a down move so we are going to wait for the break up and of course we are also going to wait for the break of the previous high. This is a much better example of a wedge breakout because the previous high is very close from the breakout price because this is a much longer wedge. Sometimes you are going to have longer wedges, sometimes you are going to have shorter wedges. But in any case, you have to wait for the structure to break and the overall trend to continue.
Right here you can see that this is a falling wedge, and once we break with the wedge and we break with the previous high, we can go and buy call options. And as you can see this option also expires in the money. So basically this is what you’re going to be doing. You are going to be looking for wedges in the market then you’re going to wait for the wedge to break and for the structure to break in order for you to buy option. When this happens, you’re going to see 8 times out of 10 that there’s a lot of volume coming into the market and price will go rapidly in your direction.