The breakout strategy is built on the idea that price sitting in a range for a while, once it breaks a significant support or resistance level, is likely to continue moving in the same direction. It's one of the basic technical analysis strategies, adapted for binary options' short expirations.
The logic behind the breakout strategy
Support and resistance levels form where price has repeatedly reversed in the past. When accumulated buying or selling pressure overcomes a level's resistance, price breaks through and typically continues by inertia — some market participants who expected a reversal at the level are forced to close positions against the trend, which reinforces the move.
How to find a significant level to trade a breakout
Not every horizontal line on a chart matters equally. For a breakout strategy, pick levels that:
- Have formed at least two or three times over recent sessions.
- Coincide with round, psychologically significant price values.
- Are confirmed on a higher timeframe, not just on the minute chart.
- Were accompanied by noticeable trading volume on previous approaches to the level.
How to tell a real breakout from a false one
A false breakout is the main risk of this strategy: price briefly moves past the level and immediately returns, leaving the trader with a loss. A few signs help tell a real breakout apart:
- The breakout is accompanied by a rise in trading volume relative to the average.
- The breakout candle closes clearly above (or below) the level, rather than just touching it with a wick.
- After the breakout, price doesn't immediately return to the level but forms a small consolidation above (below) it.
- The breakout occurs during a period of elevated liquidity, not in the thin market of the Asian session.
Entry options on a breakout
Traders use two main approaches: entering immediately on the breakout candle, which gives a better price but carries higher false-breakout risk, and entering on a pullback to the broken level, which reduces risk but can miss a strong move if the pullback doesn't happen. The choice depends on risk tolerance and how quickly a result is needed on short expirations.
Timeframes for the breakout strategy
The breakout strategy works better on timeframes of 5 minutes and up, since the minute chart has too many small false breakouts caused by ordinary price noise. When trading on Pocket Option with short expirations, it's worth confirming the breakout on a higher chart before entering on the target timeframe.
Automating the breakout strategy
Finding levels and confirming a breakout with volume can be formalized into a set of rules and have its signal calculation automated. A trading robot for Pocket Option can track levels and confirm breakouts against set criteria with no human involvement — details on the features page.
Conclusion
The breakout strategy works well in active markets with clear support and resistance levels, but requires volume confirmation and caution around false breakouts. Compare it with an alternative approach in the article on the bounce strategy off a level, and ready-made settings for automatic level detection are in the robot's plans.