A stop loss order is a special form of market order used by professional traders to limit their losses. Stop loss orders are especially interesting for binary options traders because they usually occur in bundles at strategic places.
When the market reaches the price level of these orders, they get triggered automatically. As a result, there is a strong incline in supply, which leads to a rapid decline in prices. By learning to identify the spots stop loss order usually occur in, a trader can establish a secure way to finding good investment opportunities.
What is a stop loss order?
Let us imagine a trader has bought an asset at price of $100 because he predicted rising prices for the asset in the near future. He also knows that his prediction becomes invalid if the price of the asset should fall below $98. To make sure he does not lose more money than necessary if his prediction was wrong, the trader wants to make sure the asset is sold automatically when its price falls to $98.
That is what a stop loss order is for. The trader places a stop loss order at $98. When the market reaches that price, his asset is sold automatically.
For example, stop loss orders are usually placed at support levels. If the support level is broken it turns into a resistance, which creates an entirely different environment for most investors. They will therefore liquidate their long positions and open new short positions, which creates supply in two ways. The same happens at trend lines, in continuation patterns, and in reversal patterns.
The strong price movement created by stop loss orders is called the breakout. As a binary options trader, you can profit from the breakout in a number of ways:
- You can invest in High / Low option in the direction of the breakout. Make sure to choose an appropriate expiration time.
- If you can predict the distance of the movement, you can invest in a Boundary option or a Touch option.