Smart Break Out Strategy Review
Now, before we get started, it’s important to note that the markets are dynamic and constantly evolving. There is no guarantee that strategies that worked well in the past will continue to work in the future. As a trader, you have to learn to be nimble, have an open mind and avoid being stubborn.
Today, we’ll be looking at the smart break out strategy, how it can be applied to trading binary options on FX and whether or not it’s viable in today’s markets.
The strategy assumes these four outcomes in a trading day
- Today’s price surpasses yesterday’s high price
- Today’s price surpasses yesterday’s low price
- Inside bar day, we don’t see a higher high or a lower low from the previous day
- Outside bar day, we see a higher high and a lower low from the previous day
How to initiate a trade
- If today’s price surpasses yesterday’s high price, you should initiate a long position (calls).
- If today’s price surpasses yesterday’s low price, you should initiate a short position (puts)
- On an inside bar day, you’d not take a position.
- On an outside bar day, taking a position is not advised because of the increased volatility.
The goal is to capture small pips a day, while minimizing losses.
The idea working in action
Here is a 2 day view of this idea in action using the EUR/USD for illustration. Below in Figure1 is an example of this strategy with the high and low levels defined. If we look at the prior day on the left, we notice the floor created from the lows that were near the close on the day. Early the next day, those lows were re-tested and the support level failed to hold here, and then continued to head lower. This is a physiological level in price action, because when a low (or support) level fails, it indicates great weakness to traders. If traders are looking for an opportunity to enter short, this would be the zone due to long positions having to close, this forces additional negative pressure on the currency pair.
The idea not working in action
To illustrate how this strategy fails to work, we just need to look into the familiar bullish strategy called a “Double-Bottom” seen in Figure2. This is a popular strategy due to the simplicity and ease of execution for the trader. As stated above, the low of day break gives a very ideal entry for a short position to be placed by a trader and gives a defined risk-reward setup. If a trader bought the calls on the Double-Bottom, they would be more aggressive in his position, but capture more of the move. If one was more conservative in nature, they would identify the triple – top breakout that was soon to come and place their position there instead. The identification of both technical patterns allows for strong confirmation that their position is a bullish trade and to go forward with this decision.
How to improve the system / Conclusion
Some thought on improving the strategy comes with how technical a trader wishes to be in their analysis. It’s important to note when adding multiple indicators to a chart, it does not provide perfect entry/exit signals to the trader, and this is largely due to their conflicting nature.
To improve the system, instead of adding additional indicators to the sub graph, a trader should focus on increasing their time frame referencing. It is equally as important to know where your daily support and resistance levels are due to how significant a reaction can be. Typically, the higher the time frame the greater the strength in the support and resistance level, whereas M>D>4hr>1hr>15min>1min especially when playing breakout patterns. If failing to notice it is a breakout lower, but not recognizing that it is into strong daily support, a possible double bottom, resulting in a very negative outcome for the trader holding a long put position.
