Full Review of the Retracement Finder indicator for Binary Options
This little thingy has been on my charts for a long while and I decided it’s time to share it with you. Well, the Retracement Finder is freely available, courtesy of the Internet aka the World Weird Web, but I want to explain to you (or try at least) how to use it properly.
How to use the Retracement Finder
You probably heard the saying “the trend is your friend”, but you cannot just jump in a trade every time you see a trend and you need a good entry point. Identifying the trend is just the first part; then you have to wait patiently for price to retrace, offering you a better entry… at least that’s my opinion. That being said, let’s find out what “retracement” means. It’s actually quite simple: almost all moves against the main trend are considered retracements. So, in an uptrend, a move lower is considered a retracement and in a downtrend a move higher is also a retracement. I am sure most of you know these things, but hey, everybody needs to know them so here’s a picture:
Ok, looking back on the chart, identifying a retracement is so easy that even a kid could do it… but in a live trading environment, things start to become a little more complicated. Sure, we can all see that price is going down, but when is it going to stop? And what is considered a good retracement? Maybe just one red candle is enough, maybe 3… these are all questions that can be answered by the Retracement Finder indicator. So let’s take a look at the same chart, with the indicator on it:
A move below zero is considered a retracement. When the indicator moves back above zero, the retracement is considered finished and the trend continues. Notice how the Retracement Finder correctly identified the moves lower and more importantly, it showed us when the retracement ended. As an extra feature, I use two levels on the indicator: 100 and -100. These help me make the difference between a retracement which is too small and a tradable one. In other words, if the retracement doesn’t surpass one of the levels I mentioned, I don’t trade it because I consider it insignificant. Of course, this depends on the strategy you use and can differ from trader to trader. Another thing: by default the Retracement Finder is set to a period of 8 but I use 20 for the same reason why I added the levels: to eliminate some of the noise of the market.
Why the Retracement Finder Sucks?
The only drawback of this indicator is the fact that it is probe to false signals generated by market noise. In other words, it will go above and below zero too many times. Look to the right side of my picture above: you see what I mean? Above and below, but price doesn’t do anything significant. The 2 levels I added and the fact that I changed its settings from 8 to 20 still doesn’t help and false signals are generated anyway. Well, all indicators will have similar problems… unless we are talking about the Holy Grail.
Why the Retracement Finder doesn’t Suck?
As I said before, when you look back at a chart, trading is easy but things change in live trading when emotions are involved and your eyes don’t catch a glimpse of the next candle. All we see is the current candle and having a little help can’t hurt so to me one of the greatest advantages of this indicator is that it eliminates doubt: is the retracement over now… or should I wait for another candle… or maybe two. By having this indicator on my charts, things are easier: it went above zero – it means the retracement is over (opposite for a downtrend of course).
Wrapping it up – No indicator is perfect… but what is?
Although it is not one of the greatest tools ever made, it has been on my charts for a long time and I will keep using it for all the reasons I outlined above. Keep in mind the Retracement Finder is a tool and it’s not meant to be used alone; it has to be incorporated in a strategy for it to really shine. Take it, use it, tweak it and find the settings that suit you best. And make sure you thank the guy who coded it if you ever see him :)
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