What is a Magic Breakout System?
The binary options type of trading in the financial markets requires three market conditions to happen at the same time in order to maximize profits and gain the highest results. First, the current trend has to be sustainable, meaning that prices should move in one direction for a while.
Sideways ranges and consolidation periods suggest the price hovering up and down without any clear tendency, which lowers the efficiency of the trading process and makes the analysis more tough and complicated. Second, a rebound (retracement, correction) has to occur when price bounces off the local top/bottom of the market and give a comfortable depth to enter in the same direction as the price was moving earlier.
That's the toughest task for any kind of analysis and lots of trading strategies focus on that task. However, not every system can determine the perfect entry-level or depth of that retracement.
Third, traders should be one step forward, leading the crowd but not following it.
If you’re late in the trading decision, if you pull the trigger just when everybody is already on board, it would be hard to get maximum results. Therefore, a simple and reliable trading system is needed to describe the entry conditions in a clear way, while its technical indicators have to point the depth of the retracement in the most accurate way, and trading signals have to have the highest level of efficiency, avoiding fake breakouts.
The Magic Breakout system meets all of the requirements mentioned above. Its set of rules is understandable and easy to use, so traders would not need to invent a bicycle or ask magicians to guess on tarot cards about the next direction of the market.
The intuition part of the analysis is excluded completely as the trading algorithm is exact and precise, while the system’s efficiency is proven in practice. Trading accounts are safe when using the Magic Breakout if the money management rules are executed and entries do not exceed a certain small part of the account balance. At the same time, one of the best advantages of the Magic Breakout is that it allows traders to be one step ahead of the crowd and foresee potential breakouts before they happen.
If all of the conditions of the trading strategy are met, the beginning of the trading cycle appears to be right before the market accelerates the action and momentum spikes up. That gives an opportunity to gain maximum profits from every single trend while avoiding consolidation periods allows traders not to risk with unnecessary losses during sideways ranges.
How to use Magic Breakout System?
Three technical indicators are used here. The main one is a so-called wave, which consists of two exponential moving averages. It’s important to change the calculation approach of the EMA curves and the formula has to be implemented not for close prices as usual but for high and low prices. That parameter can be easily changed in the indicator settings window. Another important parameter to modify is the period of the EMA curve.
The default period of 9 bars has to be changed to 34 bars as it gives the widest range of the analysis and allows to asses the trend’s momentum. As a result, we get EMA34 high and EMA34 low curves. As it’s already been mentioned, we look for trendy periods, so prices have to stay above the wave for uptrend and below it for the downtrend.
If you like this strategy, you might also be interested in this: Donchian Channels
Once we’ve found a trendy period of an asset, we need to expect the trend to chart the second stage of the action, which is the retracement. The price has to enter the wave, coming back down from the local top (uptrend) or rising back up from the local bottom (downtrend). It does not really matter how deep the price will bounce, the only condition is to cross the EMA34 high for the uptrend and EMA34 low for the downtrend.
Next step is to wait until the price edges back above the EMA34 high (uptrend) or slides back below the EMA34 low (downtrend). After that, we implement a rule of 5 candles, which says that prices have to remain above/below the wave during 5 candlesticks in a row (close prices but not whipsaws and tails). Then we start looking at another technical indicator in order to find the entry signal.
An example fo the Magic Breakout trading system is shown below:
The Commodity Channel Index was initially designed for trading on commodities futures contracts, however, traders had found that it works well with binary options too. In our case, the CCI indicator has to stay in the range of -100 to +100 during the period of 5 candlesticks to double-check the trend’s momentum and determine its strength.
The only parameter to change for the CCI is the period. We recommend 21 bars for the CCI period but even the default settings are good. Making the period too long is not recommended as it makes the oscillator too slow and we’d miss an entry signal in that case. So, once the CCI indicator crosses the +100 level from downside up, and the rule of 5 candlesticks was met, then we start buying CALL options of the asset.
For the downtrend, we need to see the CCI indicator crossing the -100 level from upside down in order to start buying PUT options. Traders can continue the cycle of buying options in the same direction until the CCI indicator starts bouncing back down below the +100 line for CALL options or above the -100 line for PUT options.