The 50% retracement level can be a rewarding one if a trader knows what to look for. It’s application are very wide in the technical analysis field in the sense that Elliott Waves Theory has its own way of dealing with the fifty percent level, Fibonacci clusters are another way, while classical patterns like triangles are representing a great way to find striking prices for a binary option.
That being said, there are some important things to consider when trading the 50% level. For example, it is well known that in a contracting triangle, the most common consolidation pattern, it is mandatory for at least three legs of a triangle to retrace minimum 50% and there is a common thing for a horizontal contracting triangle to end around the 50% level.
Therefore, knowing that and calibrating the expiration date based on the time frame the pattern appears should give us an important tool for trading binary options with contracting triangles based on the 50% retracement levels.
Moreover, in an impulsive move, after the first wave, it is common for the second wave to come and retrace 50%-61.8% of the first wave before the extended wave to start, so buying call options in a bullish impulsive move is the way to go, or put options in a bearish impulsive move as well. It should be mentioned here that if the retracement level in the second wave goes way more than the fifty percent and 61.8% level, it is most likely that the second wave is not finishing there, but only part of the second wave traveled into that area. This means probably wave a would be finish there, and a b wave in the opposite direction is about to start.
50% retracement theory
Fibonacci retracement levels are a great way to find out places to go into the market and take a trade. Some traders are using only Fibonacci levels, nothing else, in the sense that they simply draw a Fibonacci tool to find out the 50% retracement from highs to lows in that specific time frame and trade an option based on the result.
For example, the way to go is to open the biggest time frame possible, the monthly chart, and zoom out so that you can see all the available candles, then mark the highs and the lows in that chart and draw a Fibonacci retracement tool in order to find out the fifty percent retracement. The next thing to do is to take that level and go on the lower time frames and to the same thing with those highs and lows and at one moment of time, when on the 4h chart or the daily one, more than three levels are drawn on the chart. They represent support and resistance level for future price and every time market is hitting them, an appropriate trade should be taken.
Some say that there is a drawdown when it comes to this approach as, because of the bigger time frames the levels are resulting, the levels to buy an options are not coming that often. This may be true for any individual stock or currency pair, but if you’re looking at the multitude of currency pairs that are being offered for trading, then it is virtually impossible not to have at least 2-3 options to be traded day in/day out. When it comes to the expiration date, I am always a fan of bigger expiration date in order to overcome economic events that might influence the success of an option.
One great way to use the fifty percent retracement level is with contracting triangles. These triangles, both the irregular and horizontal ones, have the tendency to use the fifty percent level as a pivotal level.
The way to go is to measure the length of the biggest leg of the triangle (wave a in a horizontal triangle and wave b in an irregular one) and to find out the fifty percent level and drawing a horizontal line. In a bullish triangle, there is always a strong tendency that the market is going to be attracted by the fifty percent line and below is a great place to find out striking prices for a call options. The opposite is true as well, in a bearish triangle as the fifty percent level is used for buying put options.
I would say that in the order of importance, the fifty percent retracement level is the next after the 61.8% golden ratio and this tells much about the importance a trader should pay to it.