Fibonacci is now a widely used method of analysis employed by financial traders. Fibonacci trading strategies are popular among binary options traders as they can be used to identify ‘trading points’ that can be exploited for profit.
In this article we take a look at the fundamental of Fibonacci trading.We also see how you can apply it successfully to binary options trading.
Understanding Fibonacci Trading
Today Fibonacci it is considered a legitimate technical analysis approach. However its origins lie in ancient studies. It’s basis comes from calculations conducted in the arena of applied mathematics and natural theory.
It is quite a complicated and interesting concept. We won’t go into it too much. If you are interested you read more about it here.
Fibonacci is an additive mathematical numerical sequence. Each subsequent number is the sum of the preceding two numbers in the sequence. Confused? Let’s look at an example.
Starting from 1 the sequence runs 2 (1+1), 3 (2+1), 5 (3+2), 8 (5+3) etc.
From this sequence a set of ratios can be defined which can then be plotted on a financial chart. They are generally plotted from the high to the low (or low to the high) of a predefined move.
The ratios are used to identify points of extension and retraction from the high and low of the move. These define levels where support or resistance is anticipated to occur.
While this may sound complicated, the application of this technique is straightforward. You won’t have to work out the numbers yourself. All good charting packages provide a Fibonacci indicator so you can quickly plot the moves.
To be an efficient Fibonacci trader you first need to identify a move.
Typically a strong rise or fall in an assets price is a good place to start. You need to identify the high and the low of this move to be able to calculate the ratios.
Most charting software will have an inbuilt Fibonacci tool. Often this will allow you to simply drag a line between both points. The software will then calculate the correct ratios and plot as series of levels along the move. You can of course work out these levels yourself. Get yourself a Fibonacci calculator and enter the highest and lowest levels into it.
The most common Fibonacci ratios used are 23.2%, 38.2%, 50.0% and 61.8%. These are levels where support or resistance levels are expected to be seen.
Following a prior move it is often anticipated that the price of an asset will pull back to at least the 50% level before the original trend resumes. However if this level fails then a full ‘retracement’ to 61.8% is considered most likely. This can provide a good point to enter the market. Here you would trade in the direction of the original move.
These levels are widely watched by traders. They tend to work precisely because so many traders will react at these levels. Therefore they can make for a particular strong signal when trading with binary options.
Simple Fibonacci Trading Strategy for Binary Options
Example - The NASDAQ has moved from x to y. Following a stall in this price rise a Fibonacci calculation is applied to the chart using the highest value that the price reached and the lowest value that it reached.
From plotting this information on the chart it is possible to see potential support levels from where a pullback in the price may find support.
So how can you use this data to trade?
Well the answer is simple. Like all profitable binary options strategies it is important to keep it simple!
The 50.0% and 61.8% levels are the most reliable to trade. Use these as to signal a break or as a reversals point.
Things To Consider
Fibonacci levels can be used to create a support and resistance strategy. For this reason it is recommend that the many of the same trading principles are applied.
Just like conventional support and resistance levels you can use them to project expected areas of interest on the chart.
However don’t treat these levels as absolute. Instead , use them as potential areas of support and resistance. In this way you can define areas on your chart where you can identify potential areas of a market slowdown before entering a position.
With any areas of support or resistance, it is important to be aware of the limitations of Fibonacci. These levels are only indications and not absolutes. Use them as a guide to help provide a new perspective to your trading.