Options Bands Retracement Forex Trading Strategy

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Options Bands Retracement Forex Trading Strategy

Trending markets are excellent market conditions to find high probability trade setups which could help traders consistently earn a profit from the forex market. This is because trending markets tend to provide the trade direction as a given. Price tends to move in the direction of the trend more often than not. This gives traders the answer to one of the two most important questions when entering a trade. That first question is which direction should the trade be taken. Traders who could answer that tend to have a higher probability of turning in a profit on each trade more often than not.

However, the second question tends to be the trickier one. Where or when do we take the trade? It might be a given which direction we should take, however entering at the wrong time might give us a higher risk compared to our potential profits. Trend and momentum traders who tend to chase price often ends up losing bigger amounts than the profits they are earning.

This is where trading on retracements come into play. Retracements are scenarios in a market wherein price is reverting closer to its mean as the market contracts for a while. However, it does not mean that the trend is reversing. Often, after the retracement is another momentum push moving in the direction of the trend.

Here, we will explore how the Binary Options Bands indicator can be used to anticipate deep retracements.

Binary Options Bands

Binary Options Bands is a custom technical indicator which is a channel or band type of indicator. It was mainly developed to be used in the binary options market. However, this indicator also works well with the forex market.

This indicator plots three lines that form a channel like structure. The top line is based on the highest high plotted by price action within a preset period. The bottom line is based on the lowest low of price action within the same period. The middle line is simply the median of the top and bottom lines.

This indicator can be used to identify trend direction. This is simply based on which half of the channel price action is generally staying. If price action is usually on the upper half, then the trend is bullish. On the other hand, if price action is usually on the lower half of the channel, then the trend is bearish. If price action tends to whipsaw the middle line, then the market is not trending.

The middle line can also be used as an area of dynamic support or resistance. Price tends to bounce off these levels during a trending market condition.

Stochastic Cross Alert

Stochastic Cross Alert indicator is a custom signal indicator which is based on the Stochastic Oscillator.

The Stochastic Oscillator is a widely used oscillator which plots two lines that oscillate within the range of zero to 100. These lines are derived from recent price movements and are used to identify trend or momentum direction. If the faster line is above the slower line, the momentum is said to be bullish. On the other hand, the momentum is bearish if the faster line is below the slower line. Crossovers between the two lines indicate a potential momentum reversal.

The Stochastic Oscillator range also typically has markers at level 20 and 80. Lines crossing below 20 indicate a probable bullish mean reversal coming from an oversold condition, while crossovers occurring above 80 indicate a bearish mean reversal coming from an overbought condition. Both conditions tend to be high probability reversal signals.

The Stochastic Cross Alert indicator is based on this concept. It plots an arrow pointing up if its underlying stochastic lines indicate a bullish momentum reversal, and an arrow pointing down if it detects a bearish momentum reversal.

Trading Strategy

Options Bands Retracement Forex Trading Strategy is a trend following strategy which trades on retracements based on the Binary Options Bands indicator while using the Stochastic Cross Alert indicator as the entry signal.

First, trend direction must be identified using the Binary Options Bands channel. Trend direction is based on the general location of price action in relation to the midline of the Binary Options Bands channel. This would indicate which half of the Binary Options Bands channel price action is generally residing.

Then, as the trend is identified, we wait for price to retrace towards the midline of the Binary Options Bands channel. Price action should reject it indicating that it is respected by price as a dynamic support or resistance level. The momentum reversal is then confirmed based on the Stochastic Cross Alert indicator plotting an arrow pointing the direction of the main trend.

Indicators:

  • Binary-options-bands
  • Stochastic_Cross_Alert
    • K Period: 15

Preferred Time Frames: 30-minute, 1-hour, 4-hour and daily charts

Currency Pairs: FX majors, minors and crosses

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • Price action should generally be on the upper half of the Binary Options Bands channel.
  • Price should retrace towards the midline of the channel.
  • Enter a buy order as soon as the Stochastic Cross Alert indicator plots an arrow pointing up.

Stop Loss

  • Set the stop loss on the support below the entry candle.

Exit

  • Close the trade as soon as the Stochastic Cross Alert indicator plots an arrow pointing down.

Options Bands Retracement Forex Trading Strategy

Options Bands Retracement Forex Trading Strategy 2

Sell Trade Setup

Entry

  • Price action should generally be on the lower half of the Binary Options Bands channel.
  • Price should retrace towards the midline of the channel.
  • Enter a sell order as soon as the Stochastic Cross Alert indicator plots an arrow pointing down.

Stop Loss

  • Set the stop loss on the resistance above the entry candle.

Exit

  • Close the trade as soon as the Stochastic Cross Alert indicator plots an arrow pointing up.

Options Bands Retracement Forex Trading Strategy 3

Options Bands Retracement Forex Trading Strategy 4

Conclusion

This trading strategy which is centered around the use of the Binary Options Bands indicator as a means of identifying trend direction is an effective trading method.

Although the said indicator was mainly developed for Binary Options, it is still very effective when used in most forex pairs.

The key is in identifying trending forex pairs properly. Trade setups tend to work well when used in the right trending market environment.

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