Are you having trouble determining how far the market will move? Percentage retracements are exactly the tool you need to take your trading to the next level.
What are percentage retracements?
Percentage retracements are a helpful tool for swing traders to determine how far the correction in a trend will move. The market never moves in a straight line. Instead, it creates trends. Trends move in zigzag lines, continuously creating higher highs and higher lows in an upwards trend, and lower lows and lower highs in a downwards trend.
In other words: In a trend, the market is constantly moving from high to low. The movement against the trends main direction is called the correction or the retracement.
Swing traders try to benefit from every single movement from high to low and vice versa. Therefore, swing traders have to be able to predict how far a retracement will move. This way, they can determine whether a touch option is a good investment in the current environment, or, if the correction has been moving for a while, if they should still invest in the correction or look for signs of the trend returning to its main direction again.
When do percentage retracements occur?
As history shows, the correction in a trend will likely move one third, two thirds, or half the distance of the preceding movement.
The exact percentage values traders use to estimate the size of a retracement varies. Some traders use 33 percent, 50 percent, and 66 percent. Other traders believe in Fibonacci retracements. The Fibonacci series is the series of numbers developed by Leonardo Fibonacci in which every number is the sum of the two preceding number: 0, 1, 2, 3, 5, 8, 13, 21, 34, 55, and so on.
By using these numbers to calculate the distance of the movement, traders get the value of 38.2 percent and 61.8 percent for the likely end of a retracement. Most good charting software, such as the very popular Meta Trader, can draw percentage retracements into your chart automatically, thereby saving you the need for endless calculations with pen and paper.
How to trade percentage retracements
If you are trying to create an automated trading system, you will need to make a decision on which values to use. The most important fact to understand about percentage retracements is that the retracement almost never ends at the exact percentage value any theory provides. Otherwise, past evidence would be clear and would render the discussion about different values unnecessary.
Instead, the retracement usually ends at some point near one of the percentage values. Therefore, you have to use a range of percentages, for example from 33 percent to 38 percent, 48 percent to 52 percent, and 61 to 66 percent, of you are developing an automated trading system and need fixed values.
As a regular binary options trader, you should not allow the discussion about different percentage values to confuse you. Just use the rough indication of one third, two third, and a half.
If you are investing in high / low options, you can use percentage retracements to search for an indication of an impending change in price direction near these price levels. If you find it, you can invest in a changing market direction. If the market moves past one value, you can try to find a binary option with a short expiration time that allows you to invest in the continuation of the current movement before it reaches the next percentage level where it is likely to stop.
If you are investing in touch options or boundary options, you can use percentage retracements as a target for the distance a correction will move. If you recognize a correction and find a touch option with a target price closer than the next percentage retracement, you can use this opportunity for a relatively sure investment in a touch option.