Touch trading with binary options is distinct from the One Touch options provided by many binary options platforms in that it allows traders to set their own strike price. Touch trading simply refers to purchasing binary options when price touches a certain level based on the price-action analysis signalling a high probability that price will reverse. For binary options traders there are several key indicators and tools which can be used to identify touch trade reversals and one of these methods is the combination of the Fibonacci retracement tool provided by almost all charting software and the stochastic oscillator.
Using the Fibonacci retracement tool in identifying a touch trade
The Fibonacci retracement tool is a powerful identifier of ‘natural’ retracement limits following a strong down or up trend. In order to increase the chances of a touch trade being successful the Fibonacci retracement tool needs to be applied to the swing high and low of a recent, strong up or down trend on any price chart. Following any strong trend, price will very often retrace and form a correction before continuing in the direction of the underlying trend. The Fibonacci tool will show the important levels for traders to watch out for in order to observe the price action that will indicate that the retracement is over and that price will move higher or low, allowing for binary options to be purchased.
Applying the stochastic oscillator to define the strike price
Stochastic oscillators are one of the most useful tools for binary options traders looking for reversals in the market. Typically, a stochastic oscillator will show a trader that when price has entered the ‘overbought’ area of over 70 on the indicator index, or the ‘oversold’ area below 30, the underlying asset is very likely due a price reversal.
Applying the information provided by the stochastic oscillator, the trader can follow the price retracement following a strong trend and look for both the stochastic and the Fibonacci tool to demonstrate a high-probability trade. The setup for this trade strategy occurs when the price retracement touches one of the levels shown by the Fibonacci retracement tool. If the stochastic oscillator corresponds by showing the underlying asset as within the overbought or oversold zones (depending if the retracement is up or down) then this confirms a reversal trade in the direction of the main trend. The confluence of confirmation by both Fibonacci and the stochastic oscillator proves a high probability that the retracement is over.
Timing of the binary options touch trade
Timing of this binary options trading strategy will depend on the time frame which the chart analysis is being undertaken. The general rule will be to allow the binary options as much time as possible before expiry which, on the daily chary, may mean up to 7 days form the strike price. On lower time frames it is important to consider that trading these reversals should result in a larger move in the direction of the trend soon after the touch has been spotted, allowing plenty of time for the binary options to expire in the money.
