Basics of binary options: market maker traps
- VFX Blog
- For beginners
How many times have you thought that you were completely sure of a trend change, and then bit your elbows, watching a completely opposite reversal? How many times since then have you reviewed the ideas of how to make money on binary option? But it's not your fault. The whole problem is in the traps that market makers set for us to activate their own pending orders or knock out your expirations. Today we will briefly look at how to identify the trap, what they are and how to try to make money on them. Let's start with the definition.
A “trap” is a moment when large players try to convince the bulk of small market participants of the correctness of a false move.
Looking for traps
Let's look at the picture below and answer the question, where is the opportunity for top binary options signals? There are Price Action patterns behind which not a reversal begins, but pullbacks and corrections. Only when market makers closed their pending orders did they start making uptrend and downtrend.
Breakdowns of levels are very noticeable, but if they do not occur during the release of important fundamental news and occur without preliminary testing and trading binary signals, you need to look at their presence on other timeframes.
We look at the Pin-Bar on the daily chart of the GBP/USD pair. Let's move on to a smaller time frame for a more detailed analysis - a pin bar is also observed on H4 and H1.
Changing the timeframe to a smaller M30, we see that there is no pin-bar here, and in fact, in this place, market makers were deceiving. The chart shows regular candles that break through the round price level and then the market starts to reverse.
On high timeframes, where a large pin bar is visible with a clear bounce from the level, experienced traders would not open options in the direction of the breakout. But on M30, the situation is no longer so clear - an attempt to break outlasts several candles (which is itself a clear sign of a possible trap), and after a breakout to open a PUT option, everything looks perfect. Newbies usually end up in spreading nets, so be careful with auto binary signals!
The main types of traps
We can say that most traps are nothing more than false breakouts of strong price levels and support / resistance lines. The first of these will be the classic «Double Bottom/Double Top» chart pattern.
Many who started looking for and working out a double top or bottom noticed that the second top is almost always slightly higher than the first, and the second bottom, on the contrary, is slightly lower, although the original interpretation of the pattern assumes a second top below the first, indicating a slowdown in market movement. But in fact, it is at the first top that the bulk of small options are located, which market makers “select” in their binary option strategy to increase overall liquidity and turn the market around.
Thus, this trap is a breakout during the correction of the local high / low, after which the bulk of traders expect a trend reversal, but in fact this does not happen. We remind you once again that the classical principle of technical analysis, which says that a breakdown of a local maximum on a downtrend means its end, does not always work.
Important: if there is a breakdown of the level against a long trend, then most likely, free live binary signals will be false. If the market calms down and goes into a sideways movement, you should switch to the "Inside/Outside" range options or, if the channel is wide enough, open a CALL/PUT when rebounding from its borders.
The next type of trap is on the news. A familiar situation – after the release of the data, the price goes in one direction with great speed, knocking down several significant levels on the way, and then at the same pace makes a turn and returns to the starting point. As you probably already understood, in order to avoid the trap, we need to look at small, not high timeframes on which nothing is visible.
Now let's look at the traps when opening trading sessions. Everyone is familiar with the example of the European session, when there is one movement before the opening of London, after the opening there is usually a reversal and in the future the price can change direction again. This fact is used by the classic exact binary option strategy breakout, such as the "London Explosion" and the like. In fact, we again have a collection of small stops by market makers and only then the actual beginning of the "true" movement.
In order to understand what actually happened, in the example above we had to switch to the smallest minute timeframe, where the market moves most "plausibly". We saw the price rise and then make a clear bounce from the 1.21400 level.
Summarize: when there is a breakout of any strong price level, be it around level, a local high / low or strong support/resistance, we must first assume a false breakout and this is a market maker's trap for collecting expirations and live trading signals of small players. While there is no confirmation from technical indicators and price-fixing above or below the level, we do not open any deals.
Recommendations about use …
- In order to understand whether there is a trap or not, it is necessary to analyze several timeframes. As soon as a breakdown of a strong price level occurs, move to smaller intervals to confirm it;
- At the first sign of a price reversal, we open an option with an expiration of at least 5-7 bars, since there may be several additional price spikes, which almost always end at a loss for a short transaction period. Working during traps requires to experience and taking into account the features of how signals work for binary options on a traded asset, so first practice on a demo account;
- Open no more than 5% of the deposit amount;
- The probability of a rebound from the level is always higher than its breakout.