There is no powerful move than the one that is taking the previous highs in a bullish trend or the one that is taking the previous lows in a bearish trend. A bullish or a bearish trend means a market that is rising or a market that is falling, and therefore buying strength in the case of trading binary options means buying call options, while buying weakness means buying put options.
In trading in general, buying at the highs or selling at the lows presents the risk of market reversing and this is why a lot of traders are actually avoiding such a situation in order not to be trapped on the wrong side of the market.
However, it should be interpreted differently: if the market had the strength to recover and go for the previous highs it means that somebody bought it, it was in a demand area, and we might just want to join the party by trading in the same direction. The same is valid with selling the lows and only that in this situation we are buying put options. This is valid very much in the case of continuation patterns like pennants, triangles, etc.
The Risky Approach to Trading
This buying strength/selling weakness approach is not for the weak ones because most of the times, if not all the times, it implies buying in overbought areas (where everyone is selling, remember?) and selling in oversold areas. Basically, with this approach you are thinking differently than the vast majority of traders.
However, this approach has a great advantage: it allows a trader to stay with the trend, so basically it is not that risky. I mean if market went all the way into overbought territory, then chances that it is going to continue that trend rather than reverse are much bigger. Trading the FX market with this approach means that pending orders can be placed, so when one wants to buy from higher levels, pending buy stop orders should be placed. The same is valid when one wants to sell from lower levels, the orders to be placed are called sell stop orders.
In the first instance in the example above, it is said that you buy strength, as you buy from higher levels, while in the second one it is said that you sell weakness, as you’re selling from lower levels.
Avoiding Swings in Opposite Direction
Trading binaries is a bit more complicated as when you want to go long from higher values you should buy call options from that level but the thing is that you cannot place pending orders. This makes the binary options trader more vulnerable than the FX trader as it needs to sit in front of the screens more. However, this disadvantage is overruled greatly by the fact that in binary trading the expiration date can be set higher and in this way swings in opposite directions can be avoided. FX trading is not offering this advantage.
In terms of Elliott Waves Theory, buying strength means that basically market is travelling in an impulsive wave as it is almost the only situation when overbought levels are forming. The same is valid for selling weakness. It could be that market is actually travelling in corrective waves, but only if those are zigzags or zigzag family patterns as they are the only corrective waves that resemble impulsive activity.
Divergencies with Buying Strength/Selling Weakness Strategy
If all the above were not enough to understand the complexity of this approach, there is one more thing difficult to overcome: divergences. Almost always market will diverge at that area and it really doesn’t matter what kind of oscillator you are plotting on the screen as at that moment of time they will all diverge.
We all know that divergences are a sign to trade in the other direction as markets are forming a move contrary to the one that the oscillator is forming. This is very true. However, in reality, market can stay in a divergence more than a trader can stay solvent and even if the market is retracing a bit, it would be only an opportunity for new buyers in a bullish trend or sellers in a bearish trend to step up and buy/sell the new opportunity.
Watch Out for the Psychology
Human nature plays a trick on all of us when it comes to trading as exactly when you’re not expecting a move to come, or when you’re convinced it is not possible for price to make a specific move, market will prove that not only it is possible, but it is most likely.
Therefore, contrarian trading is a very popular technique and sometimes it is proven to be even more useful than classical approaches. After all, traders are struggling to find the right striking price and maybe this struggle should be minimized by looking the other way.