Trading on breakouts is a very profitable trading strategy. Ranges are easy to spot, making the range breakout strategy very popular. However, many traders lose money on this strategy, mainly because of false breakouts, corrections to the breakout point and unrealistic expectations.
Traders use many technical indicators and trading patterns to establish the momentum and direction of breakouts: pennants (flags), triangles, head and shoulders, moving averages, trend lines, support, and resistance levels (pivot points) are among the most popular identification methods.
Breakout Strategy belongs to advanced, untraditional strategies implemented only in recent years. Some traders swear that only unorthodox strategies bring real and, most importantly, stable profit. Let us discuss the Breakout strategy based on two tools SMA and RSI. You can find those indicators in the Pocket Option terminal, so you can set up your trading and test the new system right after reading the article.
Setting up the indicators for trading
As usual, we should start with setting parameters of the tools. The Breakout strategy is designed for junior timeframes. Set the timeframe to recommended M5 and choose Japanese candlesticks.
The strategy got its name for a reason. Do you know a definition of a breakout? A breakout is a situation when the price overcomes the trend line in one or the other direction. It is this state that usually signals the change of the current trend and the formation of a new one.
Identifying a breakout is a special skill even for experienced traders. Binary options trading is simple because it is enough to determine the price direction. You need the SMA as a trend line to spot the moment of trend change.
Experienced traders know that some breakouts and fakeouts. There are many false signals. The statistics shows that a clear majority, 71% of stock breakouts are currently back below their pivot point. About 43% have clearly failed and are at least -10% or more below the pivot. For the best-case scenario, just 12% are at least +10% above their pivot. Another 18% are above the pivot but by less than +10%.
To be confident, we will need RSI oscillator to generate a confirming signal. The settings for the expert advisors are SMA – 10, and for RSI – 14.
How to trade with Breakout Strategy
A work of caution first: the described strategy is not good for flat market. The market must be trending, in other words, you need to see clear waves on the chart either above or below the SMA.
For RSI, you will need the 50 level with this strategy. The signal line above 50 will indicate strengthening buyer’s market, and below it – strengthening sellers. A breakout is a price movement that occurs when the price of an asset exceeds a previously established resistance or support level. It can be either bullish (breakout above resistance) or bearish (breakout below support) and is often seen as a signal of a potential trend reversal or continuation.
A CALL contract is purchased when the SMA is broken out the bottom-up and the RSI is above the 50 level.
A PUT option is done when the price has broken the moving average from top to bottom and the RSI has fallen below the 50 level.
If you trade on the M5 timeframe, the expiry time in this case will be 15 minutes.
From history of trading, breakout trading tends to be the most profitable. One of the reasons for that is that the market moves up and down means that there is profit to be made. Even when it trends, it moves in waves that often oscillate around its moving average.
