Penelope Hughes

May 3, 2020

Splitting a Range To find levels for Put and Call Options (1/2)

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In today’s post, we will be explaining using Fibonacci retracement tools in range bound Digital options trading in order to find the appropriate levels for put and call options. Specifically, we will be discussing how to use the Fibonacci retracement tool to identify when to use the traditional high/low option and when a one-touch option would be a better choice.
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Identifying a Trading Range:

The first thing a trader has to learn is how to identify a trading range. This is when the price movement of an asset is stuck within a certain range; this is also known as an asset being ‘range bound’. In range-bound trading, the price of an asset is said to be moving sideways. The best way to identify a trading range is by a visual analysis of a chart.

The above is a basic example of an asset that is currently range bound; the top line is known as the ‘resistance’ level and the bottom is known as the ‘support’ level. To fully determine if the asset’s price is range bound, there must be at least 2 high points and 2 low points with the highs and lows being parallel to each other.

Range Bound Trading Risks:

Since an asset that is range bound creates predictable price movements, it is possible to formulate profitable trading strategies subsequent to identifying a trading range, such as with the Fibonacci retracement tool. Before we delve into that, we must first elaborate on the main risk of range bound trading; namely breakouts.

A breakout occurs when the price of an asset, instead of merely testing the support and resistance levels breaks through them. This can leave a trader holding worthless options; for example, if a trader buys a put option when the price nears the resistance levels in anticipation of a price drop but the price breaks out of the range and keeps increasing instead, then the put options are rendered worthless. Similarly, if a trader buys call options when the price nears support levels in anticipation of a price increase but the price breaks out of the range and keeps decreasing, then the call options are also out of the money.

Further, there is no real way to determine when such price breakouts will occur, and many traders have been left holding worthless options in such cases. As we have repeatedly stressed, there is no such thing as guaranteed strategies in trading; even the most technically sound trading strategies will not and cannot be 100%.

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