If you’re making a binary options trade with the aid of a chart, one pattern you’re going to start to notice in the way that price moves is called a retracement. You’ll probably notice that even a trending price, whether it’s going up or down, does so in steps. Price will go up a fair distance, and then it will hesitate and often go down again. It may not go as far down; after a short interval going down it will go right back up and continue along the trend. After it has moved up a fair distance, it will again briefly go down again before rallying and continuing upward, and so on.
These little backtracks in price are retracements. When the price of an asset briefly goes back on its course before resuming along its way, we say the price is retracing. Retracements can cause traders grief for a couple of reasons. The first reason is that when price retraces, it can look like a trend reversal when it’s really not one. This can cause some traders to exit early (if that choice is available from the broker).
It can also cause some traders to lose money in trades they should have won.
For example, let’s say you’re in a One Touch trade on a currency you believe is bullish, and that your trade will be open for one hour before the time on it expires. Price is moving up toward your price, and then it reverses. It never reaches your trigger during the hour, but after the hour is up, price completes the retracement and then goes on to touch your trigger, except now you’re no longer in your trade. You lost money even though you were right about the trend, because you weren’t in the trade for a long enough time.
How do you avoid these pitfalls? There’s no foolproof way to get around them, but a well-developed trading method will help you to identify retracements and to see a difference between retracements and genuine trend reversals.
One great technique is to actually expect retracements in circumstances where they’re likely, and then wait for the retracement before you enter a trade. You’ll be able to learn how to do this with practice and testing, and also by learning from the experiences of others. If price retraces off of a moving average, that’s a great time to jump into a trade since the moving average acts as support or resistance for your trade setup.
Learn how to trade retracements and take advantage of one of the quality binary options brokers at binaryoptionsbrokers.ca.