In contrast to usual trading strategies based on traditional oscillators, ‘Donchian Channel Double-Breakout’ binary options trading strategy is aimed to find exactly the breakthrough moments and price ranges. It’s based on a combination of two technical tools - Donchian Channels - with different periods: 20 (blue background on the chart below) and 55 (yellow background). Donchian Channel’s approach is similar to the Bollinger Bands technical indicator, however, it does not measure the volatility spikes. The mathematical method is based on a comparison of highest and lowest prices in the chosen period. The top line of the range shifts down when the price reaches the Donchian Channel bottom line during a downtrend and the bottom line jumps up when the price breaks through the top range. The combination of two different parameters is used for more precise identification of the trend breakthrough. This binary options strategy is suitable for any asset with any timeframe to trade, although, some of the settings related to the continuation should be adjusted depending on the instrument and charts duration. We’ll take EUR/USD H1 as an example.
When a trading signal occurred, meaning that the current price crosses the upper line of Donchian Channel with period 20 bars (blue background), traders should start buying call options. Moreover, if the price runs so quickly that it breaks even the upper line of the Donchian Channel with 55-period (yellow background), then the trading volume should be even increased. Otherwise, if the 20-period Donchian is breached the second time, while 55-period isn’t breached yet, the trading volume stays at the same level as the initial deal.
The more important question is how long traders should keep buying call options? The answer depends on the asset and timeframe, of course. In our case, the EUR/USD one-hour chart is normal for the volatility of 40 pips. So, if the price has gone 40 pips from the initial trading signal, then traders should stop buying call options, with the condition that 55-bars Donchian Channel isn’t breached yet. At the same time, the relation of two different periods has to be monitored on the chart. If the total spread widened the range, then options have to be bought in the same direction.
Conditions for buying put options, according to ‘Donchian Channel Double-Breakout’ binary options trading strategy, are the same but with the mirror opposite perspective. If the current price crosses the bottom range of the Donchian Channel with 20-period (blue background), then the put option has to be bought. Traders should continue buying put options if the price breaches the same line the second time. Moreover, the trading volume has to be increased, according to the money management rules though, when the price is able to cross the lower bottom line of 55-bars Donchian Channel (yellow background). Traders should stop buying binary options in the same direction with the same conditions as described above for call options.
An example of the ‘Donchian Channel Double-Breakout’ binary options trading strategy may be found on the chart below.