Trading Binaries with the Fibonacci Tool

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Fibonacci and Binary Options

One of the more popular methods of predicting asset movement is through a sequence of numbers known as Fibonacci retracement. Many Forex traders use this method to help them figure out when to enter and exit a position within a currency pair, but it really can be used with any type of asset. With a good charting package you will be able to calculate these price levels automatically, but having a good understanding of what they mean and how these numbers can impact your trading is still necessary for being successful with this method of trading.

What it is?
A Fibonacci retracement is a method of technical analysis that is sometimes used as a short term trading tool that can help traders predict future price movements. Fibonacci retracements are based upon the Fibonacci sequence of numbers where every new number is based upon the sum of the past two numbers. A common sequence would look like this, “1, 1, 2, 3, 5, 8, 13,” and so on. The most commonly used levels when it comes to short term trading are 23.6, 38.2, and 61.8. 50.0 is also sometimes added into the equation in order to give a stable point of reference.

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How it works is quite simple. These numbers often act as support and resistance levels within the price chart of a given asset. Why it works is not entirely clear; it could even be a sort of self-fulfilling prophecy that traders make happen simply because they expect it to happen. Still, this happens often enough that it has become a viable way to help a trader make money.

When a currency is headed in a certain direction, it will often meet resistance at the 23.6 percent mark. So if a pair is headed down in price, when it reaches 23.6, the fall will level out or perhaps even slightly reverse. This resistance to change is usually short lived, and the price will continue within its predominant trend shortly. The same will often happen around 38.2 and 61.8 percent.

How to use Fibonacci?
When you’re using Fibonacci retracement within your trading, how you use it depends upon your timeframe, especially if you are trading binary options. The common rule of thumb is that you should not trade against the dominant trend, and Fibonacci numbers do not go against this wisdom. Even if you are trading 60 second binary options, you do not want to go against the trend, even if you are at a key price level. There is no way to predict how long this resistance will last. The best way to handle the situation is to pause your trading on the asset in question until the retracement period has passed. So if you are trading 60 second call options on the USD/CAD pair, and the price hits the 38.2 percent level, the best way to handle this is to simply stop and wait. Once the retracement period goes by, you can resume your trading.

So the best way to use this is as a warning system. Prices will pause at a certain level more often than not because traders expect them to. In reality, Fibonacci numbers don’t work on a mechanical level, but rather a psychological one. Still, it does regularly happen, and you need to be aware that it will happen if you want to be successful. During the points of resistance, prices will not follow the trend, but may go slightly up or down while stuck here. Even with 60 second options, the slight movements are not going to be profitable for you often enough to be worthwhile.

How to Trade with Fibonacci Retracements?

Fibonacci Lines are a powerful technical analysis tool that can be applied to both downward and upward trends, all assets and timeframes. The tool is represented on a price chart as a collection of horizontal lines that correspond to Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. It is used to determine the possible support and resistance levels. The tool is named after a 13th-century Italian mathematician Fibonacci and his self-named mathematical sequence.

How to Use Fibonacci Lines in Trading?

In order to use this tool effectively we first have to understand what support and resistance levels do represent. Support and resistance levels are psychological barriers that the price action is believed to test while moving in a particular direction. When approaching one of the levels, the trend can be expected to either continue its movement or bounce back and reverse. Certain experts believe that trend reversals happen more often around the retracement lines.

Retracement is a part of a larger trend

A retracement is a short-term price movement that goes against the general trend, and Fibonacci Lines excel at identifying those moments. The tool can be used for determining both buying and selling opportunities. During the uptrend, Fibonacci Retracement can be used as a buy signal during the pullback. During the downtrend, Fibonacci lines can be used to determine optimal short selling positions. Some traders believe that the most important retracement level to follow is 61.8, which can also be explained with basic market psychology. The possibility of price swings in this area is higher due to extensive buying or selling pressure (depending on the trend direction). Remember that retracement can be confused with a trend reversal, which in turn can negatively affect your trading performance.

Spots where the price action stumbles around the Fibonacci lines are marked with yellow

It can also be wise to accompany Fibonacci Lines with one of the momentum indicators (e.g. Stochastic Oscillator or MACD).

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Set Up and Apply

Setting up Fibonacci Retracement is easy.

1. Click on the ‘Graphical tools’ button and choose ‘Fibonacci Lines’ from the list of available tools.

2. Find the most recent swing highs and swing lows. For downtrends, click on the swing high and drag the cursor to the most recent swing low. For uptrends, do the opposite: click on the swing low and drag the cursor to the most recent swing high.

3. Fibonacci Retracement levels will then appear on the price chart.

Conclusion

Fibonacci Retracement is an interesting technical analysis tool with limited, yet useful, functionality. Fibonacci Lines help identify optimal entry points during the so-called retracements. Traders, however, have to keep in mind that support and resistance levels provided by this tool are not always foolproof. Instead, they represent “areas of interest”. Fibonacci Retracement does not provide enough information to use it as a leading indicator but can become a useful complementary tool for making medium and long-term decisions.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.

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Trading Binaries with the Fibonacci Tool

One of the most important trading tools one trading platform can offer are for sure the Fibonacci tools, the retracement, expansion, but also the time zones and arcs. Knowing what they are useful for and what to do with them offers the binary options trader a competitive advantage in finding the perfect striking price and expiration date needed for the option to expire in the money. For CFDs traders they are indenspensable in trying to predict the future movement of the underlying assets.

Regardless of the trading platform involved, this is the tool that takes into consideration the retracement for specific waves (Fibonacci Retracement), the extension for impulsive moves (Fibonacci Extension) or even the time element (Fibonacci time zone). In our situation here with the Forex Academy program we are looking at the Fibonacci Extension Tool and how can a trader use it and, more importantly, how to actually trade based on it or with it.

How to Use Fibonacci Extension Tool

Trading implies taking the time element into consideration and, depending on the time frame traded, the expansion tool provided by Fibonacci is of real help. Our examples there deal with one of the most common pattern of them all in trading markets: the impulsive move using Elliott Waves theory. The thing is that in an impulsive move at least one wave needs to be extended and this wave it is usually the third one. That means the trader, after identifying a possible first wave, should take the Fibonacci expansion tool and look for the 161.8% extension when compared with the previous wave. Clicking on the beginning on the first wave a, the end of it and the end of the possible second wave gives us the setup for the extension tool and the outcome should be expected at the 161.8% level. If this is not coming, then the move is not impulsive and the whole count prior to that point should be reconsidered.

Predictions Based on Fibonacci Numbers

This tool is only of the many that any trading platform is offering as Fibonacci is being used in pretty much everything that is related to technical analysis theories. There is simply not possible to make a prediction based on patterns if one is not considering the Fibonacci numbers. The Expansion tool is used to find out the extended waves in impulsive move, but also in finding out, let’s say, the end of the b waves in running triangles.

In any impulsive move there is mandatory for price to go and extend one wave and this means that one wave should go and stand out of the crowd, it should be the longest one. The extension has some minimum boundaries, and in order to find the exact place we need to use the Fibonacci expansion. In other words, let’s say we have a move to the upside and market is accelerating but according to our analysis it should reverse at some point. The way to find out the potential level is to look at the length of the first move higher and then measure the 161.8% extension out of it.

Looking for Extended Waves

Applying the extension from the end of the second wave would offer the trade an educated guess regarding the end of the third wave and a put option can be traded with the expiration date being related with the time frame the impulsive move was appearing on. It is advisable that one should look for extended waves or move before important economic events as market needs a reason for a specific move and the reason is coming out of the economic agenda. Therefore, releases like jobs data, GDP (Gross Domestic Product), retails sales, unemployment rate, etc, may prove decisive for a central bank to change the monetary policy stance and that is the moment markets are travelling.

Fibonacci Expansion Tool and Corrective Waves

The expansion tool can be used in corrective waves as well as the b wave in a flat for example can be a strong one, and this means it should break the highs/lows of the previous wave a, depending if wave a is bearish or bullish. In this case, a move for the b wave above the 161.8% level signals a c wave to come that should not break the lows/highs in the previous wave a and therefore trading call options by the time price comes into the territory of wave a is indicated.

The Fibonacci Expansion tool is a simple one to use in the sense that one should only select it from the Menu (in the case the analysis is made on Metatrader then one should go on Insert/Fibonacci/Expansion) and then click and drag it on the screen. It should be noted that if you’re looking for a running correction, namely when the bearish correction ends above the end of the previous bullish move, then the expansion tool on the Metatrader cannot be used. Other trading platforms though, like the JForex for example, are not having this issue.

Find out exactly where and how to use the Fibonacci expansion tool by watching the two video analysis that are coming with this educational series.

The scheme of trading binary options using Fibonacci levels

Being a beginner in trading binary options, you probably already reviewed many strategies for trading binary options. All effective strategies are based on trade in the direction of the so-called trend. It is necessary to make a deal precisely when the price is reversed. This phenomenon in the world of trading is still called correction. When the time comes for the correction of prices for the selected trade asset, prices begin, as a rule, to unfold. To determine the depth of the correction of the value of the asset we need, we will use the Fibonacci grid.

The Fibonacci grid is nothing else but a tool for technical analysis.

Fibonacci grid

As we said earlier, the Fibonacci grid is an analysis tool that is based on the patterns of Fibonacci numbers. As this regularity looks, every number that follows the previous one is equal to the sum of the two previous numbers. For an example, it’s better to look at a series of numbers constructed using this pattern (1, 1, 2, 3, 5, 8, and so on).

The construction of such a series will allow us to determine the depth of the correction of quotations of assets of interest to us. Using this series of numbers, you can also determine the size of the future wave of price movement.

How this strategy works

As a rule, every modern binary options broker is trying to provide a large selection of analysis tools for successful trading. The instrument that interests us most often is in the section of graphical analysis tools. It is called the Fibonacci Grid.

Model the situation. Movement of quotations a certain period of time moved upwards. As you understand yourself, making a deal to raise in this case will not be the most correct decision. There is an opinion that it is possible with a high probability to turn the quotations in another direction.

The optimal level of the conclusion of the transaction is the price increase due to the corrective movement. After the turn, quotes should continue their movement towards the trend.

Defining this level

To do this, we need to apply the Fibonacci Grid to the quotation schedule. Next, we determine the trend we need. Based on the growing trend, we will need to place the “0” level, that is, this will be our foundation. Accordingly, the “100” level will be our top.

Now we need to place these indicators in the appropriate places on the quotation chart. Now it will be in order to examine the typical levels between which the correction will occur.

– Between 50% and 62% for growing trends

– No more than 62% for downward trends

Having reached these levels, quotes have the property to turn in another direction and will continue their movement towards the trend.

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