As we have mentioned in prior articles, binary options can be a great way to trade using Fibonacci levels. This is due to the nature of binary options – you select the strike level and then enter into a yes / no proposition. Traders who use price levels based and create a view of whether a market will be above or below that price at a specific time will find that binary trading offers a neat complement to their trading style.
Yesterday, the EUR/USD saw a big rally, as shown on the 15-minute candlestick chart below. It’s common after an unusual rally for price to retrace at least a portion. One of the most relevant ways to gauge price retracements is by using the 50% market from the low to the high – basically, this is the halfway back point after a larger move, and offers a potential area where support may be found.
Currently, the EUR/USD is trading at 1.0635, and the 50% retracement level is two pips below at 1.0633. The binary option table below shows options that expire at 3:00 p.m. EST today and includes two options relatively close to this retracement level. Please keep in mind that the example we will use is not intended to be a recommendation of any specific trade or market view, but is to be used as an illustration of how you may choose to implement binary options.
Some traders may prefer to trade the 1.06540 strike option, which is located five pips above current market and seven pips above the retracement level. If you believe that price will bounce now from that price level, then you could buy this option at the offer of $48.25. When buying a binary option, you want price to settle above the strike at expiration. The risk would be limited to the purchase price, which is $48.25 in this case, while the potential reward would be the difference between the risk and the $100 settlement value, or $51.75 on this option. So this option offer better than a 100% return on risk for a settlement five pips above current market price.
On the other hand, some traders may prefer the idea of buying the 1.0620 strike option since it allows more room for traders to be correct. This option requires traders to pay more for the option since it is in-the-money (ITM) – currently the offer is $69.25 while the option is 15 pips ITM. Traders who preferred to trade this binary would risk $69.25 to potentially earn $30.75, or better than a 40% on risk. This market could go higher, sideways, or even a little lower and traders could still have room to earn profit.
Your trading personality and risk-to-reward needs will determine the kind of strategies you choose to implement when trading binaries with Fibonacci extensions or with other trading tools. If you were bearish this currency pair, you could trade the reverse of the above examples by selling either one of these strikes instead of buying them. When selling a binary option, you would want price to settle below the strike, and your potential profit would be the sale amount, while the risk would be the difference between that selling price and the $100 base value.
Binary options offer many ways to compliment trading styles – this example just illustrates a couple of possibilities within one expiration time-frame on one instrument pair. Binary trading gives traders a creative way to profit from any market environment, which is why trading them has become one of the fastest growing movements in the world and in the United States.
Note: Exchange fees not included in calculations.