Getting the timing right is one of the most difficult tasks in trading. Why is that like that? It may be because our innate instincts always allow us to take the cautious path. Or can you say that you always act "now or never" before you make a serious decision? Rather not, because our rational approach to relevant decisions prevents us from taking an increased risk.
For this reason, breakout strategies, for example, are more popular. Unfortunately, it is a fallacy that outbreaks provide the better entry signals. Just because an outbreak suggests our subconscious, who is looking for security, that more purchases would then take place, we consider outbreaks to be so important. However, if one were to carry out a statistical evaluation, it would also be highly likely that the majority of the outbreaks will be accompanied by fakeouts. A good breakout strategy must therefore be optimized like any other. However, it hardly has an advantage over other strategies.
Recognizing the advantages by rethinking
In order to secure an advantage by starting earlier, you usually have to rethink. It is helpful to compare the scenarios that arise in the event of a possible reversal or an outbreak. So what can happen if you try to anticipate a reversal early?
- The trend continues and you are stopped.
- The reversal establishes a new trend and you are early Enough.
And what can happen if you only start with a breakout of a high?
- The outbreak is a fakeout and you are stopped.
- The outbreak confirms the reversal and you remain invested.
What are the differences in the scenarios? At first glance, almost none, because there are two probabilities with both entry techniques: either the trade works or not. In this respect there would be no reason to prefer the outbreak strategy. But what reason would there be to prefer the reversal strategy to others?
Example on the DAX Future
To recognize this reason, you have to rethink again. The advantage that is always seen in the breakout strategy is that one assumes a subsequent dynamic increase. But what about risk management? Logically, the probability of a stop loss taking effect at a loss is always higher with a late entry - unless you set the stop further away from the purchase price. The following chart of the DAX futures contrasts the two techniques to illustrate this fact.
The hammer that has formed on the upper trend line and the formation of an SKS formation indicate a continuation of the upward movement, The set-up is a signal for the early entry with a stop below the trend line, while the second entry takes place only when the last high breaks.
The stop loss is defined as a trailing stop and is followed by the risk can be eliminated after a while. With late entry, on the other hand, the stop cannot be made so early, and if the price then falls back dynamically, a loss can be realized for better or worse.
The example clearly shows that the advantage of an early entry is clearly in the reduced risk lies. Of course, it cannot be ruled out that the price will drop earlier in this case and a loss will result. In contrast to the delayed entry, if the upward movement continues, the risk can be almost completely eliminated by pulling the stop.
No stops are set when trading binary options. Nevertheless, this entry-level technology definitely offers a better edge because you can participate in the trend for longer by getting started early. The choice of term is therefore variable and not only limited to the price movements shortly after entry.
Why You Shouldn't EVER Trade OTC Binary with Your Weekday Binary Trading Strategies
Conclusion: Rethinking helps to control one's risk awareness
We humans often make decisions based on rational thinking. Caution is one of our instincts. However, it often happens that we overlook the advantages that result from standing against these instincts; these advantages often outweigh them. Profit traders know that. Beginners often lose money because they rely on the supposedly reliable set-ups, but they haven't generated an edge for a long time - unless these set-ups are greatly optimized.
Early entrances generate an advantage simply because many of the investors and traders prefer the classic set-ups to get started. In addition, a better CRV (opportunity-risk ratio) can often be achieved by starting earlier. To acquire this technique, the trader only needs to be aware that the risk of entering late is not much less than early. Even more, the late entry trade may end at a loss while an intact trend is developing, while the stop of an early entry can be placed well below the trend limits.
With the broker Binary.com it is possible to to implement such strategies well.