Tuesday, October 22nd, 2013 by Tim Lanoue
As many of you may know trading online is no easy task and to trade profitable is even more difficult. For this reason many trading experts and gurus have come up with an array of strategies and guidelines to help prove the success rate of traders. One easy, applicable strategy would be reversal and breakout trading. Reversal and breakout is one that is not often practiced today because it mostly goes with trend trading however when used correctly it can yield a large amount of winning trades.
So what are reversals and breakouts?
Reversals and breakouts are drastic changes in trend directions over a short period of time. More often than not reversals and breakouts occur after a press release is announced or during the end of a trading session. These are often easy to predict which allows traders the ability to go big on some trades and come out with a nice profit. The picture below is a good example of reversal and breakouts that could have been traded.
One of the great advantages with reversals and breakouts is that you can use it on nearly any time frame. That means you can use it from the one minute time frame to the daily time frame. However, ideally this binary options strategy is used more often with a time frame of 30 minutes or less. Spotting potential trend reversals or breakouts can be relatively easy if you know some basic terminology and have a rough idea on what you are looking for.
Below is a picture of the Eur/Usd asset. In the picture you can see the overall trend of the asset which is known as order flow, order flow is simply the summation of all buy and sell orders of an asset at any given moment of time. In this particular example the trend of the asset is mostly bearish until it becomes neutral at the end. When it comes to trading reversals or breakouts we need to identify three characteristics of the asset.
The first characteristic we need to spot would be the trend of the asset. Is the graph displaying a strong uptrend, downtrend or neutral trend? If you are working with a shorter time frame ideally you want to use a more volatile asset because reversals and breakouts are more prone to happen. The second factor we look for would be if the direction of the asset is slowing down or not, is it peaking or bottoming out? Next, when we think the reversal is going to take place we need to wait for our indicating candle to close and wait for a candle of the opposite color to appear then we place our trade. We wait for the candle of the opposite color to appear as a confirmation that the trend of the asset is more than likely changing directions.
Trading reversals and breakouts is a relatively easy strategy and is easy to use. This is a great strategy to use and can be helpful in your trading arsenal. This strategy is good by itself but can be bettered if combined with other indicators like Fibonacci arcs, EMAs, or true volume.