How to Trade Breakouts with Binary Options

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Video Transcription:

Hello, traders. Welcome to Day Trading Binary Options. Today, we’re going
to teach you how to trade breakouts with support and resistance levels and
trend lines. First of all, why do we trade breakouts? Well, breakouts are a
powerful way to trade binary options. The idea behind this is to capitalize
on price momentum after a period of consolidation. A consolidation period
is a period where price action has no clear direction and is respecting
clear levels.

Normally this happens when we get an influx in buying or selling volume
that is strong enough to break through these levels. When this happens,
price will move quickly with a defined direction. This is called momentum.
Normally the most explosive breakouts occur when price breaks out of a
channel or a trend line. But what we will also learn how to trade
profitably, breakouts above resistance and below support. Now, here is an
example of a breakout after a consolidation period. This breakout example
is actually a reversal trade. As you can see here, we have a clear and
defined down move from this high to this low. Then we have a consolidation
period. This is what we defined as consolidation period. As you can see, we
have a clear area of support that price is not breaking through and an area
of resistance that price has tested quite a lot of times.

Then when price breaks above it, we have a signal, in this case, to buy
call options and to profit from the momentum to the upside. So as you can
see, we had a clear down move, then a consolidation period. This is caused
maybe because the people that were short from this high were taking profit
on their trades, and maybe we had some people or some traders here trying
to buy this asset, creating a buying force that was holding this support
area. When the buying power was bigger than the selling power, we had a
breakout above the resistance. We will profit from this momentum to the
upside.

Now, here’s an example of a breakout of a ranging market. This breakout
example happened after a long period of ranging price action. As you can
see here, we have a clear and defined range. Price is going to test this
resistance level, and then come back and test this support level, over and
over. Okay?

This is different than consolidation period because a ranging market or a
ranging price action is actually tradable. We could buy put options at the
top and call options at the bottom. But in this lesson, we are only
focusing on breakouts. Okay? Then we have a breakout to the downside,
meaning that this area of support was broken, and we had a momentum to the
downside. You can see the aggressive move to the downside, comparing these
candles with the candles inside the range. Now, the thing about this is
that we had a clear and defined structure. Okay? When this structure
breaks, we will profit from the momentum either to the downside or to the
upside.

Now, let’s look at an example of a breakout of trending market. This
breakout example happened after a down move. You can clearly see that we
have a clear and defined down move. We have a test of this trend line,
once, twice, and price tests it again right here. Okay? We are making lower
highs, which means that we are in a down move. Also, we are making lower
lows. Okay? This is a definition of a down move.

This trend line acts as a descending resistance. Okay? Because we tested it
here once, twice, and we tested it here and rejected it three times before
moving to this low again. Then we have a breakout here. When price breaks
above this descending resistance, the structure of the market changes
drastically. We are going to profit from the momentum to the upside.
Remember then, when a breakout happens, it’s because we have an influx of
buying power, in this case. When the breakout actually happens, a lot of
traders will want to profit from the momentum to the upside. So they are
going to start buying this asset, making it go higher. So this is basically
how you see or how you trade breakouts, either from consolidation periods,
either from ranging markets, or from trending markets. How do we actually
trade them? What is the setup to look after? Okay. As we seen on the
previous slides, when a breakout happens, bull activity increases. So you
have to be fast to buy your options. Okay?

You also need to be careful not to get caught in a fake-out. A fake-out, as
its name implies, is a false breakout. A false breakout happens when we,
for example, we are in a ranging market. Okay? Price moves to the downside,
and we have a candle that drastically breaks with the defined support. But
then, we have another candle that moves up and closes above support. This
is what we call a fake-out because price actually broke with the
resistance, but went back to the range.

We need to avoid to trade these breakouts, and we’re going to teach you how
to identify them. Okay. To avoid this, you need to wait for confirmation
that a current market structure has been broken. What’s the confirmation
that we’re looking for? Well, the setup is to wait for a candle to
aggressively break structure and close outside of it. Then, the next candle
needs to open above it, if we are trading a long breakout, or below it if
we are trading a short breakout. Then continue with the impulse. Okay?
Continue with the momentum or continue with the direction of the breakout.
If you don’t have continuation of the impulse, then we are in a fake-out.

The expiration time of your options depends on what timeframe you are
analyzing price action on and trading from. For example, if you are
analyzing the 15-minute chart, you might want to trade the hourly to the
two-hour expiration options. If you are analyzing the one-hour chart, for
example, you might want to trade the end-of-day expiration option. This is
because, remember, we are profiting from momentum, and momentum has an
expiration also, meaning that the impulse that made price break out of the
current market structure is going to end. The impulse is going to end
because most of the traders trading the breakout are momentum traders, and
they only profit from the impulse that made price break out of the
structure.

So you need to be careful because if you are trading or analyzing the 15-
minute charts, and you are trading a breakout and you choose the trade the
end-of-day expiration option, price might reverse on you because you are
trading to a lower . . . or you are analyzing price action on a too low of
a timeframe, visa vis, the expiration option that you are choosing to
trade. So you have to be careful with that also.

Why don’t we go to the charts and see if we can actually chase some
breakouts of our own? Okay. So here’s my empty floor platform, and we’re
going to look for some actual breakouts that we might have traded or some
breakouts that are happening right now. Let’s start with the GVP/USD. This
is the four-hour chart. Okay? Since we are day trading the four-hour chart,
it’s too high of a timeframe, too [inaudible 08:54] analyze [inaudible
08:55]. If you’re actually trading from the four-hour chart, you might want
to trade at the end of week-expiration. Here’s an example of a nice
breakout of a trend line or of a channel.

Now, this is very interesting. Actually we are going to use this example,
and let’s assume that this is actually the 15-minute chart. Okay? You can
see that price was actually in an uptrend, and then started to move to the
downside, breaking this structure right here. Okay? Let’s grab a nice trend
line and put it right here. You can see that we were making higher highs
and higher lows, etc., and then we broke with the structure, with the
market structure, giving us here signal to buy puts on the GVP/USD.

Now, let’s assume that this is the 15-minute chart. If this is the 15-
minute chart, we will have chosen to trade maybe an hourly expiration
option, meaning that one, two, three, four candles after the breakout, we
would have ended up . . . Our option would have expired in the money. But
here’s what’s interesting. Okay? We broke with this market structure. So we
are now in a down move. But then, price started to move up inside of this
channel, and then broke to the downside. Now, this is what you need to
understand, guys. Once we have a clear and defined move, price will
certainly, or most of the times, move in the opposite direction, and then
continue aggressively to the downside in this case. This is called a flag.
Okay?

It’s called a flag because, let me just get rid of this trend line, it’s
called a flag because you have the pole of the flag right here, which is
the action move. Okay? And you have what’s called the correction pattern,
which is the actual flag. When we get a breakout right here, boom. This
candle closes below the structure that we already discussed. We have a
signal right here to buy puts on the GVP/USD. If we are trading from the 15-
minute chart, we can choose to trade the hourly or the two-hour expiration
option. This is the hourly chart. We can trade the end-of-day expiration
option, and all of them would have expired in the money. So you can see
that trading breakouts is quite powerful. You can also see that we have
learned a pattern, which is called a flag, which is a continuation pattern
of a down or an uptrend. Okay?

Now, this is the GVP/USD. Let’s go to the Euro/US dollar, and this is
actually the one-hour chart. Okay? Here’s a clear example of a support area
being broken. Okay? Now, it’s not as clear as I would hope it to be, but it
is, nevertheless, a breakout below support. Okay.

Now, the down move came here. We found support in this area, then tested it
again here. Then here, we had a fake-out. This is a fake-out, guys.
Remember, this candle closed below support, but this candle closed above
support. So this is called a fake-out because price did not actually break
through support.

Now, we had a candle that closed below support, which is this red candle,
the first red candle that closed blow support. But then again, we had
another blue candle that closed above it. So we choose not to trade this
breakout because it’s also a fake-out. But when this candle closed below
these two lows, the lows of the fake-out, we had a confirmation of the
continuation. We could have actually bought, here, a put option on the
Euro/US dollar, for an end-of-day expiration.

But remember that it is now 6:00 in the afternoon. So the equity market in
the United States is closed. Europe is closed, and Asia and Australia are
about to open. So volatility is low. This is why you have this kind of a
consolidation period that has been going on for at least six hours now. But
this is just a clear example of how breakouts work. If we move back in
historic price action, you can see that here we have a trend line. Okay? A
trend line is just two lows that . . . Well, in this case, it’s a lower low
and a higher low that you put together with a trend line. Of course, the
more times the trend line is tested, the stronger the trend line is. The
stronger the trend line is, the more aggressive the breakout will be. But
in this case, we actually had an aggressive breakout. When we had a
continuation to the downside, we had a signal to buy put options on the
Euro/US dollar one-hour chart. Yeah, on the one-hour chart. So we choose to
trade an end-of-day expiration, which would have clearly expired in the
money.

Now, there’s a few things that you need to understand. Okay? We have here
an area of support, right in the middle of this consolidation period, but
it’s also an area that has been tested as resistance once, twice, and now,
and support before we had a pick to the upside. We need to close below this
area of support also, because even though if we break below this trend
line, price might react to this historic area of support and previously
resistance and move back up. So we need to clear both the trend line and
the support area. I think on the GVP/USD, we had the same example. Let me
show you guys. We did actually. In this case, we need to clear this area of
support, which we clearly cleared once price went back here and retested it
as resistance.

So you need to be careful when trading breakouts because sometimes you will
have areas of support, in this case, or in the opposite case resistance
areas that price needs to clear before you can actually buy your options.
In this case, this entry was a little bit too aggressive, in my opinion,
because as you can see, price went down. Firstly, broke with the flag
pattern, and secondly with the area of support, but went back up and tested
the previous area of support and resistance before continuing with a
drastic move to the downside. So you need to be careful when applying
breakouts or when trading breakouts. You need to see if you have areas of
support or resistance that you need to clear when price is breaking out of
trend lines. Basically this is how you trade breakouts. Let’s hope that you
learn how to do it and profit from it.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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