Smart Break Out Strategy – Not As Smart As It Sounds

 

Full Review of the Smart Break Out Strategy for Binary Options

 

Simple breakout strategies are not as simple as their authors would like you to believe. If trading breakouts were that simple everyone would be a millionaire.

 

I have had several requests for a simple breakout strategy for trading binary options. After searching across the internet what I have found is that there are hundreds of strategies labeled as “simple breakouts” but very few that are simple to employ. Trading of any kind, whether it be binary options, forex or futures is not a simple task and anyone relying on others for a “simple” system may be setting themselves up for big losses. As an example of just how not-simple breakout trading can be I have chosen this thread I found on Babypips.com. This strategy is titled the “Smart Breakout Strategy”. The author is likely to be very smart, the principal behind the strategy is sound, but in practice it leaves much to be desired. This is made clear in the comments following the original post.

 

 

What Is The Smart Break Out Strategy?

The Smart Break Out Strategy is a forex strategy that can be easily adapted to binary options. The strategy is based on daily price movements and seeks to make regular small gains in actively traded currency pairs. The strategy is based on four potential scenarios, one of which will happen each day regardless of other market factors. The author assumes that today’s price will perform in relation to yesterday’s price in one of four ways. First, the price today will break yesterday’s high. Second, the price today will break yesterday’s low. Third, the price today will break both the high and low of yesterday’s action. Fourth, the price today will not break the high or low of yesterday’s action.

 

 

Binary Options strategy 

The Smart Break Out Strategy Is A Simple Method For Choosing Entry And Direction. Notice How There Are No Rules For Taking Profit Or Screening Potential Trades For Traps Or Whipsaws.

 

 

The first two scenarios are possible winners. If the price breaks the high or the low the idea is to trade in the direction of the breakout. If price breaks the high buy calls with hourly or end of the day expiration. If price breaks the low then buy puts with hourly or end of the day expiration. On days when there is no break through then there is no trade and on days when price breaks the high and the low then there is a probability of a losing trade.  The idea behind the system is to pick a high number of potential winners (80% according to the author) and take profits at a set point (which is left unclear).

 

 

Why This Strategy Doesn’t Suck

Breakouts are a well known and well respected form of trading. The trouble with searching for a good, simple, breakout strategy is that there are hundreds of types of break outs to choose from. In my search this week I came across break out strategies based on Bollinger Bands, Elliot Waves, Elder Rays, Moving Averages, Fractals and Fibonacci’s. The one thing they all had in common was that they were not very simple to use. All required some deeper knowledge and understanding of technical analysis and trading theory. This strategy does not suck because it is very simple to follow.  It begins with a good premise and offers simple criteria for entry. There is little room for second guessing oneself which is an area where many new traders often find themselves losing money. 

 

 

Why This Strategy Sucks

This strategy sucks for one glaring reason. It is too simple. If trading breakouts was as simple as this then we would all be doing it and we would all be very rich. It also sucks because it comes very close to a scalping strategy.  Scalpers also rely on repetitive small movements of the underlying asset in order to profit. Scalpers have to trade numerous times a day in order to be successful, this opens them up to a lot of risk, much more than the proponents of said strategies like you to believe. It also sucks because it is just the bare bones of a strategy. It does not utilize any other form of technical analysis to help screen out potential losers. There is no consideration of trend, support or resistance.  Not to mention the underlying fundamentals of the asset being traded. Yet another reason why it sucks is that it is a day-trading strategy. It requires traders to keep up with markets on an intra-day and day-to-day level, not something that everyone can or wants to do.

 

 

My Last Word On The Smart Breakout Strategy

The Smart Breakout Strategy is OK. It’s not awesome and it doesn’t totally suck. It is a simple form of entry picking but leaves a lot to be desired. I’m not sure if this is a good strategy for Forex but it does seem to have relevancy in binary. In forex you have to get a certain number of pips in order to make the trade profitable, in binary you only need one.  It could be OK for a beginner who is looking for a good starting place to work on a more complex strategy or for a more advanced trader who already has a solid foundation in technical analysis. For beginners, I would suggest only using this in a demo account until you have a firm grip on trend analysis. For advanced traders this could be a viable form of entry AFTER you have determined trend and potential support/resistance areas for yourself. 

 

 

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