Price Action Strategy
After you have made a study of trading charts for some time, you will observe that price does not move just in a simple straight or horizontal line but instead oscillates in a sequence of waves. Essentially, traders have created binary options strategies that aim to exploit the ebbing and flowing of this distinctive price action. One particular technique aimed to achieve this objective is structured on the concepts of retracements.
What Are Price Retracements?
So what precisely are retracements? They are transitory price retractions that are created within a larger price channel or trend. Their most significant attribute is that they are just temporary events before price recommences its initial directional course. You need to learn how to differentiate price retracements from the more permanent and serious reversals. You can distinguish between the two by using the following key differences:
- Retracements are normally created by the small investors withdrawing profits and subsequently do not generate significant increases in trading volume. Full-blown reversals are usually instigated by large institutional selling and produce substantial surges in trading volume.
- Retracements generate just a minor number of chart patterns which are limited to a few simple candlestick formations. In contrast, reversals are such prominent events that they are able to create major chart formations, such as head and shoulders and double tops, etc.
- The life expectancy of retracements is normally quite short as they do not exist for more than a few days. Reversals are more permanent fixtures that can survive up to weeks, if not, months.
- Retracements are formed usually after significant large price surges have occurred. Reversals are independent events that can be created at any time.
Another very important feature about Trend Retracements is that they provide you with the important benefit of allowing you to trade with the trend. Once you have devised a method to detect retracements, you will then need to incorporate a technique to determine their range. One of the most popular tools for undertaking this task is the Fibonacci retracements.
The most popular retracement levels are the 38.2%, 50%, and 61.8%. You can anticipate price retracing to the 38.2% Fibonacci level during a strong trend whereas it could correct as far as to the 61.8% one during weaker ones. The 50 % retracement level is the one that is most commonly utilized and is a key area to open CALL binary options in up-trends or PUT binary options in down-trends.
The above diagram displays the Fibonacci levels (blue lines) associated with the upward price movement represented by the red sloping line. The three most important Fibonacci levels at 61.8%, 50% and 38.2% are all shown. These are the levels that price will normally bounce back during a retracement. If one of these levels holds and you are able to open a new position then it should have a very good risk-to-reward ratio.
However, although this is a good way of defining entry points, Fibonacci Levels are still not an exact science and can be very misleading to traders, especially new ones. Many times, traders become too impatient and enter trades before the trend has actually formed. They also have a tendency to assume, for example, that the 38.2% Fibonacci level will hold without allowing enough time to monitor exactly what the market will do.
To overcome such problems, you must be patient and wait until the end of the closing period of the current time bar in order to evaluate the current market conditions accurately. In summary, a binary options strategy based on trend retracement provides excellent opportunities of locating new trading opportunities possessing minimum risk and optimum profit potential.
A sample Trend Retracement strategy will now be presented based on Fibonacci levels.
1. The asset selected is the USD/CHF.
2. The time-frame chosen is the 4 hour.
3. The main technical indicator is the Fibonacci level.
4. Use the EMA100 (exponential moving average) and EMA200 to determine the direction of the trend. If EMA100 is above the EMA200 then the trend is bullish. If the EMA100 is below EMA200, then trend is bearish.
5. The close value of the current candlestick will be utilized as a confirmation signal.
Open the 4 hour USDCHF trading chart and activate the EMA100 and EMA200 exponential moving averages. The above chart displays a bear channel with the EMA100 lower than EMA200.
Next you need to identify a price wave larger than 100 pips and open the Fibonacci levels. An example is given in the above diagram. You need then to patiently wait to confirm price rebounding against the 38.2%, the 50% or 61.8% levels as shown again in the above diagram.
A CALL binary option (see binary options trade types) should be opened as follows. A bull trend must be detected by confirming that EMA100 is higher than EMA200. A 100 pip bull wave needs to be identified and the Fibonacci levels activated. Wait until a bounce against the 38.2%, 50% or 60% occurs and then execute a new CALL binary option based on the USD/CHF.
A PUT binary option should be activated as follows. A bear trend must be detected by confirming that EMA100 is lower than EMA200. A 100 pip bull wave needs to be identified and the Fibonacci levels activated. Wait until a bounce against the 38.2%, 50% or 60% occurs and then execute a new PUT binary option based on the USD/CHF.
Binary options based by price action have proven to be quite successful. This is especially so if they are based on trend retracements. If you intend to incorporate a technical indicator, such as the Fibonacci Retracements, into your strategy then you need to realize that it produces it best results when install on trading charts utilizing the longer time-frames from the hourly upwards. Price action strategies operate equally well with most binary options types, including the lucrative ‘Touch” variant.