False breaks occur in all the markets, especially in an environment with low liquidity. Since they occur so many times, there must be at least an effective way to take advantage of them. There are actually a ton of ways to exploit false break but we will discuss one of them which we believe is appropriate for all the binary options traders.
The actual setup explained
We must begin by saying that at least a basic knowledge about technical analysis should be known, so you will manage to understand better what we are explaining. We will take an actual example for the chart, you will manage to understand better how to approach false breaks.
Below you can see a chart with the Facebook stock. The main thing we have drawn is the key resistance area located around the 185 level. The price of the stock had been consistently trading on the upside for a few years and also managed to break above the 185 resistance level.
Source: dailyfx.com
However, following the break we see that the buyers were unable to hold the gains the counter-trend players, in this case, the sellers, had begun to gain ground. They did so in an impulsive way, driving the price below the 185 key level. This is one of the most important element of our setup – the impulsive move on the other side of the initial breakout.
That communicates that the counter-trend players had not been impressed by the break and are willing to step in at a better price to begin a reversal. As you can see, the price had managed to recover following the bearish impulsive move, but where did it stall?
Around the 185 key level. After three failed attempts to break on the upside, the sellers had resumed and a 25% drop followed. You need the discipline to exploit this kind of setups and place profitable binary options.
You will find this market behavior on smaller time frames as well and their offer opportunities for trading. You can place binary options at the key level that you have found or wait for a confirmation of the false break if you are more conservative.