Fake Breakout Strategy For Binary Options – Tutorial


False breakouts occur when the market price momentarily breaks through a resistance or support level before resuming its original trend, and often lead traders astray, but there are strategies to profit from them in binary options trading. Experienced traders often use false breakouts to enter the market. In this article, we will show you how to trade false breakouts and what to look out for.

How to trade false breakouts with Binary Options

Good to know:

  • Fake breakouts occur when market prices temporarily breach resistance or support levels before resuming their original trend, often misleading traders.
  • Traders can profit from fake breakouts in binary options by identifying and confirming them using indicators like volume and MACD, and then quickly finding the right entry point.
  • Setting a strategic stop loss is crucial when trading false breakouts to minimize potential losses if the market direction is misjudged.
  • Successful trading of false breakouts requires experience, with practice on demo accounts recommended to learn effective entry and exit strategies.

What is the fake breakout strategy in binary options trading?

False breakouts in binary trading

The false breakout strategy is all about spotting the pattern of the same name, which occurs when market prices break away from resistance or support levels for a brief moment before continuing in their original direction. False breakouts occur when there is a strong trend and when markets are consolidating.

In fact, false breakouts are sometimes misinterpreted as real breakouts by new or inexperienced traders. Some other traders lose money following these pullbacks that happen to be fake breakouts. They also occur in range-bound markets and it is important to have support and resistance to trade a false breakout.

How do you trade a false breakout with Binary Options?

Traders use different trading strategies when approaching a fake breakout. There are various ways traders can profit from a false breakout by designing their strategies based on a few factors market experts use.

Identifying a fake breakout 

Method to spot a false breakout

It is a simple step once you understand what a false breakout looks like. The crucial point is that it happens when the market prices break out of the resistance for a short time before resuming their original course. 

Confirm that it is a fake breakout

False breakout zones
False breakout zones

You can confirm it is a false breakout if the prices on the candlestick close above the resistance. Some experienced traders prefer to look at the number of pips that the prices have moved from the resistance or support level to confirm the false breakout. 

If you need to be sure it is a false breakout, add some trading indicators, especially the volume and trend indicators. The higher the volume, shows it is an actual breakout and not a false breakout. 

The MACD will also help you confirm if it is a false breakout. It will show you the strength of the pullback, if it gives a weak signal, it means it is a false breakout. 

Find the right entry point 

Finding an entry point in binary trading

If you have confirmed the false signal, the next step is to identify the entry point fast. Look at the overall direction of the trend because you would want to trade according to the trend. A false breakout tells that the overall trend will continue, and the false breakout is against it. 

As a trader, you have to decide which method of entering suits you, using a limit order or a market order. Expert traders usually prefer to open a small trading position to limit the risks of a false breakout. The entry point is often after confirming the dominant trend and the false breakout. 

Set a stop loss 

Trading a fake breakout in binary options can be risky, and traders have to ensure they secure their funds by placing stop loss. A stop-loss strategy allows traders to cut losses they can potentially get if they are wrong in their predictions. 

Stop-loss has to be strategic to be effective, a false breakout the stop loss has to be placed on the last highest or lowest price recorded from a previous pullback. The stop loss should be close to the point you entered the trade. 

 It is very volatile and allows traders to trade volatile markets and minimize the losses they can get. It is so that if the prices retrace beyond this point, the fake breakout might be an actual breakout

Watch out for good opportunities to exit the trade

Finding an exit point in binary trading

It is imperative that once you have a strategy, you also know the points where you can exit the trade with a profit. They are known as the take profits, and they require that you have planned before you execute the trade, or have a strategy of how you will exit. 

When in a breakout, the exit point will determine if you profit or end up in losses. Traders have to have the proper timing to allow them to exit at the appropriate time without any delays. How you trade depends on how much you want to earn on the trade

When trading a false breakout, it is important to have enough experience. Traders can practise trading using the demo account and learn how to identify it. The crucial aspect they have to know is how to enter and exit the trade. 

Conclusion – Always keep an eye on false breakouts with binary options

Trading a false breakout in Binary options is not an option most traders consider since they view a false breakout as a point in the prices where they lose profits. Experienced traders have utilized this situation to open positions and profit from trading the false breakouts. 

Novice traders require to do enough practice before trading the false breakouts. New traders can mistake it for prices starting a new trend only for prices to reverse. Traders should also identify binary options that tend to get volatile. 

Traders should identify the profitable false breakouts by analyzing the risk to reward ratio to avoid losing money as not all false breakouts can get traded. If the risk is more than the reward,  you can leave that breakout and look for another one. 

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Frequently Asked Questions:

Can you predict a false breakout?

Yes, you can predict a false breakout by looking at the volume of the traders using a volume indicator. If a high volume of traders is at the breakout, it is likely to continue or deviate further from the resistance or support. 

Which type of indicator can I use to identify a false breakout?

The MACD will help you know whether it is a false breakout. If it does not diverge according to the prices on the chart, then it’s a false breakout. Technical indicators are crucial when predicting a false breakout. There are Bollinger bands and EMAs to check the volatility of the market. 

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About the author

Marc Van Sittert
Marc Van Sittert is an experienced Binary Options Trader and coach who is originally from South Africa. He started his career in 2014 by trading old-school Binary Options online. His main focus is on short-term contracts with 60-second trades.

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