In our previous blog post on the impact of economic factors on binary options, we mentioned the use of a retracement strategy as one of the ways that traders could take advantage of the key decisions made by central banks with regard to interest rates.
Retracement entry strategies are trend following strategies which depend on trend identification of the daily chart. As such, they are not suitable for your regular 15-minute or 1 hour binary options. They require at least a week to several months to fully play out. So while you may use some other strategy to trade the short term options, reserve this for the long term binary options trades.
This strategy requires the following:
a) Daily chart
b) Fibonacci retracement tool
c) Stochastics oscillator
Most European-style binary options brokers do not have charts that possess these tools. The charts on these platforms are too basic and not suitable for use. You need a charting software. You can easily get a free version using MT4 platform. Simply sign up for a demo account from a forex broker whose platform contains gold, silver, crude oil and stock indices in addition to currencies. I think FXCM has such an MT4 platform; you may need to check.
The Retracement Entry Strategy in Binary Options
This strategy aims to take advantage of renewed price movement in the direction of the main trend once a retracement move (caused by profit taking) is over. To do this, the Fibonacci retracement tool is applied to the charts. Five possible retracement areas (by default) are identified by horizontal trend lines, which mark the areas where the renewed trend move post-retracement may occur. The Stochastics tool is used to determine which of these 5 levels will serve as the starting point for the retracement move. Once that area has been identified by the Stochastics crossing at oversold (80 for PUT trades) areas, the trader can initiate the accompanying binary options trade.
In addition, the European binary options trade types of Touch/No Touch can be traded with this strategy. This will require using one of the retracement levels as the Touch trade strike price once the renewed trend move has commenced. If the price is going up (i.e. in an uptrend), use a Fibonacci retracement level above the re-entry level. If the price is falling (i.e. in a downtrend), use a Fibonacci retracement level below the re-entry Fibo level.
This is the example for a CALL trade. The re-entry level is at the 38.2% retracement level. This is where the Stochastics indicator is oversold. Once the daily candle at this point has closed, wait until the next candle opens before taking the CALL trade, which mirrors the expected upward movement. The expiry time should be set to a minimum of one week.
If you want to add a Touch/No Touch trade to it, use the 23.6% retracement point as price target and go with it. Remember that this example is trying to catch an upside move; this is why the Fibo level ABOVE the re-entry point is used as the strike price for this trade.
The process of taking such a trade with the American-style binary options is a bit different. We shall examine this in the next article.
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