A very popular trading strategy is termed ‘Trend Retractions’ which possesses one major benefit in that it allows you to trade in the same direction as the current trend. The main problem that you will encounter when using it is that you will need to determine if the asset price is undergoing a retraction or a more serious reversal. This difference is very important because you will need to know if the price is undergoing a permanent decline or just a temporary dip.
Þ Trader Level: Intermediate
Þ Risk Level: Medium
What are Retractions?
They are brief price dips that are created within a larger price channel or trend. Their most important feature is that they do not last for long before price resumes its original direction. Retractions are usually produced by small investors withdrawing profits and as such do not produce large increases in trading volume.
Retractions generate only minor chart formations and the ones they do are mainly limited to a few minor candle patterns. Their lifespan is usually very brief. Retractions are born normally after large price movements have been generated.
Essentially, if you detect price retracting within a bullish channel, as shown on the chart below, then you should execute a CALL binary option after it has bounced against the lower trend-line and proceeded back upwards. Similarly, you should instigate a PUT option if you detect price retracting upwards within a bearish channel and bounces against the upper trend-line.
How to Trade Retractions for Maximum Profit
- Identify Trending Channel: Locate a currency pair progressing within either a well-defined bullish or bearish channel.
- Identify Trend-lines: Create an upper trend-line by drawing a line connecting the recent highs. Similarly, draw a lower trend-line by connecting the recent lows.
- Confirm Price Test: When price retracts and hits either an upper or lower trend-line, confirm they are not breached by ensuring that the current candlestick closes below the upper trend-line or above the lower one.
- Initiating Trade: Execute 60 second PUT options if price bounds against the upper trend-line and open 60 Second CALL options if price ricochets against the lower trend-line, as displayed on the chart above.
Can’t Identify a Trending Channel?
If you are unable to identify a clear-cut trending channel on the chart of a particular asset, then leave it and study others. To be successful at this type of trading, it is essential that you can detect clearly defined trending channels without any complications.
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