A suitable binary options strategy is one which can be created from a very simple setup on the charts of the asset’s price action. The good thing about trading from the charts is that the binary options strategy setups are the same for all assets.
The binary options strategy which will be examined today is a strategy based on the break of the trend lines. A break of a trend line is essentially a breakout. So this strategy entails trading a breakout of the price action from a trend line.
The trendline breakout binary options strategy is in three phases:
a) Identifications of the trend line(s).
b) Identification of the Trendline breakout
c) Execution of the strategy in the binary options market.
Before we go on to how to identify a trendline, we have to define what it is. A trend line is a line that can be traced to join the highs of the price action or the lows of the price action, so as to determine the asset’s short term resistance (the highs) or short term support (the lows). A valid trendline must be able to connect at least three of such points for it to be valid.
Trend lines can therefore be diagonally oriented (upwards in an uptrend or downwards in a downtrend), or horizontally oriented. If both the upper and lower trend line are parallel to each other, then the price is in a channel. There is a channel tool on many trading platforms. Channels can also be formed when a pivot point calculator is used to trace pivot points, with such channels being horizontally oriented.
When do we say that the price has truly broken a trendline? This is where a lot of traders swim in the pools of abject confusion. Now let us clear this up quickly.
A breakout occurs when the asset has either risen above a resistance (or upper trend line) and CLOSED above it, or gone below the support (or lower trend line) and CLOSED below it.
It is not enough for the price to simply go above or below the key levels. If it does so and does not close above the resistance or below the support, then the asset has merely TESTED those areas. Testing those areas is not what we are looking for. We are looking for clear breaks.
Once we detect those areas where the asset has performed a trend line break, then we can safely go to the next step. But before we do this, let us look at examples of a clear breakout, and instances of a mere test of the key levels.
Binary Options Strategy Execution
The execution of the binary options strategy comes up after a clear trendline break has been identified. The logical question would be: what binary options trade type is most suitable for trading a trendline break?
The most suitable is the Call/Put option. All binary platforms have this trade type, and the principles and outcomes are the same. The other trade types are not universally offered on platforms and their expiry times and strike prices differ, making them unsuitable options to use.
How to Trade Call/Put Options Using the Trendline Breakout
To do this, you have to wait for the asset to break through the relevant trendline. More often than not, the asset will try to return to where it just came from, and will be resisted at the trendline because the trendline has performed a role reversal. The upper trendline now converts from a resistance to a support, while a broken lower trend line which previously acted as a support now becomes a resistance.
At the point that the asset’s attempted return is resisted, the relevant trades are taken as follows:
a) Break of upper trendline –> attempted return of asset below upper trendline –> trendline resists asset movement –> CALL trade.
b) Break of lower trendline –> attempted return of asset above lower trendline –> trendline resists asset movement –> PUT trade.
This is how the trendline break can be used as a binary options strategy.